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XTbe  XHniversits  of  (Tbtcaao 

FODNDED  BY  JOHN  D.  EOCKBFKLLKB 


AN  EXAMINATION  INTO  THE  ECONOMIC 

CAUSES  OF  LARGE  FORTUNES 

IN  THIS  COUNTRY 


A  DISSERTATION 

SUBMITTED  TO  THE  FACULTY  OF  THE  GRADUATE  SCHOOL  OF  ARTS  AND   LITERATURE 
IN  CANDIDACY  FOR  THE  DEGREE  OP  DOCTOR  OF  PHILOSOPHY 

(department  op  political  economt) 


BY 

DONALD   ELLIOTT  BRIDGMAN 


SAINT  PAUL 
THE  PIONEER  COMPANY 

1909 


Ube  XHniversiti?  of  (TblcaQO 

FOUNDED   BY  JOHN    D.  ROCKKFBLLKR 


AN  EXAMINATION  INTO  THE  ECONOMIC 

CAUSES  OF  LARGE  FORTUNES 

IN  THIS  COUNTRY 


A  DISSERTATION 

SUBMITTED  TO  THE  FACULTY  OF  THE  GRADUATE  SCHOOL  OF  ARTS  AND    LITERATURE 
IN  CANDIDACY  FOR  THE  DEGREE  OF  DOCTOR  OF  PHILOSOPHY 

(department  of  political  economy) 


BY 

DONALD   ELLIOTT  BRIDGMAN 


/^^? 


i£SS^'''' 


SAINT  PAUL 
THE   PIONEER  COMPANY 
1909 


H,V 


CONTENTS. 


PAGE 

Introduction lo 

Chapter  I.     THE  ASTOR  FORTUxNE ii 

§  I.     John  Jacob  Astor,  the  founder  of  the  fortune,  his  ancestry 

and  early  life 1 1 

§  2.     His  income  from  the  fur  and  China  trades 12 

§  3.     His  real  estate  investments 15 

§  4.     The  second  generation 17 

§  5.     The  third  generation  and  the  fourth  to  date.     The  family 

tree 18 

§  6.     Summary  of  the  causes  of  the  fortune 20 

Chapter  II.     THE  LIFE  OF  J.  J.  HILL 22 


§2 
§3 

§4 
§5 
§6 

§7 

§8 


Introductory 22 

Life  previous  to  his  railroad  career 22 

He  fotmds  a  syndicate  to  buy  the  St.  Paul  and  Pacific 

Railway 24 

The  prosperity  of  this  road  in  its  reorganized  form 29 

The  causes  of  this  prosperity 31 

The  organization  of  the  Great  Northern.     A  sketch  of  its 

financial  history 33 

The  traffic  story  of  the  Great  Northern 37 

Mr.  Hill's  policy  as  railroad  manager  a  cause  of  his  fortune  40 


Chapter  III.     JOHN  D.  ROCKEFELLER 46 


§  2 
§  3 
§4 
§5 
§6 


Introduction '. 46 

Mr.  Rockefeller's  early  life ". 46 

The  Standard  Oil  Company  to  1879  . . .  .• 47 

Rebates 53 

The  trust  idea 56 

Conclusion 62 


Chapter  IV.     ABSTRACT  PROPERTY  AND  LARGE  FORTUNES. .   64 

Chapter  V.     THE  ECONOMIC  CAUSES  OF  LARGE  FORTUNES...    69 

§    I.     The  entrepreneur 69 

§   2 .     The  capitalist 77 


A  n  lExamtnattnn  tntn  tt|^  lErnnntnir 
in  tIftB  Ql0untrg 


/I 


preface 


There  are  several  acknowledgments  due  with  regard  to  this 
study  which  the  author  wishes  to  make.  The  whole  of  the  thesis 
except  the  last  chapter  was  written  in  connection  with  a  seminar 
under  Prof.  J.  L.  Laughlin;  and  the  debt  resulting  from  the  crit- 
icism and  suggestions  which  he  constantly  made  would  be  hard 
to  estimate.  The  aid  was  as  readily  accepted  as  it  was  freely 
given;  and  the  obligation  is  gratefully  recognized.  Mr.  J.  J. 
Hill  kindly  listened  to  the  reading  of  Chapter  II.,  and  offered  a 
number  of  corrections  and  suggestions  which  have  been  used. 
Many  thanks  are  due  him  for  the  time  he  thus  gave,  which  fur- 
nished a  most  valuable  check  upon  the  work.  There  has  also 
been  a  real  advantage  gained  from  conversation  and  correspond- 
ence with  a  number  of  persons,  personal  friends  and  others,  who 
have  given  the  author  the  benefit  of  their  opinions  on  a  number 
of  the  points  which  the  topic  involves. 


Sntrobuction 

The  interest  in  large  fortunes  today  is  widespread  throughout 
the  country.  There  is  the  curiosity  that  attaches  to  men  of  great 
wealth  as  to  other  phenomena  out  of  the  ordinary  and  leads  the 
papers  to  report  regularly  what  Rockefeller  and  the  Vanderbilts 
are  doing.  Andjthen  there  is  the  desire  to  know  how  these  success- 
ful men  have  acquired  their  wealth  as  a  means  of  understanding 
the  requisites  of  success.  But  apart  from  such  reasons  the  question 
of  large  fortunes  in  the  United  States  presents  a  genuinely  important 
problem.  The  concentration  of  wealth  and  with  it  power  in  the 
hands  of  a  few  has  created  class  distinctions  of  significance.  That 
the  growth  has  reached  its  present  magnitude  only  recently  makes 
it  of  even  more  vital  importance  to  the  democratic  community  in 
which  it  has  taken  place. 

A  necessary  preliminary  to  passing  on  the  desirability  or 
undesirability  of  the  tendency,  or  to  deciding  what  should  be  done, 
is  to  study  how  these  individual  accumulations  have  arisen.  It  is 
apparent  that  this  is  a  question  of  the  distribution  of  wealth, 
primarily  an  economic  problem;  and  it  leads  directly  to  the  topic 
in  hand,  "an  examination  into  the  economic  causes  of  large  fortunes 
in  this  country." 

It  is  not  uncommon  to  hear  the  statement  that  the  corruption 
and  dishonesty  or  the  ability  and  energy  of  the  individual,  account 
entirely  for  his  wealth.  But  this  can  hardly  be  the  case,  since 
particular  men  have  been  as  corrupt  and  as  industrious  in  the 
past  as  in  the  present,  while  incomes  have  never  been  so  large. 
It  is  clear,  then,  that  we  must  look  further  to  general  economic 
change  to  account  for  a  class  of  people  unique  in  the  history  of  the 
world  in  the  absolute,  if  not  in  the  relative,  magnitude  of  their 
wealth. 

The  purpose  is  to  seek  the  economic  causes  of  large  fortunes 
by  a  study  of  the  history  of  certain  large  fortunes  and  seeing  how 
the  wealth  of  particular  rich  men  was  accumulated.  Astor,  Hill 
and  Rockefeller  have  been  chosen  as  typical.  They  also  offer 
variety  as  to  the  periods  and  industries  in  which  they  have  been 
engaged.  The  Astor  fortune  was  founded  in  the  early  years  of  our 
national  life,  and  has  resulted  largely  from  real  estate  speculation; 
Mr^ JHill  went  west  and  entered  railroading;  Mr.  Rockefeller's 
_jwealth  presents  the  trust  question,  an  engrossing  problem  of  to-day. 
A  discussion  of  causes  as  indicated  by  the  study  of  these  three 
cases  is  left  to  the  last. 


CHAPTER  I. 

l^tie  ^stor  Jfortune 

§  I.  The  Astor  fortune,  dating  from  the  eighteenth  century, 
has  the  distinction  of  being  the  oldest  by  several  decades  of  Amer- 
ica's largest  accumulations.  Not  only  has  it  been  able  to  survive 
the  proverbial  three  generations,  but  has  increased  steadily  and 
rapidly  since  its  inception  until  now  it  probably  amounts  to  $300,- 
000,000  in  the  hands  of  two  men.^ 

The  genius  who  founded  the  estate  was  a  German,  a  poor 
butcher's  son,  born  in  1763  at  Waldorf,  near  Heidelberg.  Although 
the  family  was  at  odds  with  Dame  Fortune  at  this  time,  there 
seems  to  have  been  titled  blood  in  their  veins;  and  titled  blood  then 
often  signified  traits  similar  to  those  of  the  money-makers  of  to-day. 
According  to  William  Waldorf  Astor's  account,  the  family  tree 
runs  back  to  Pedro  D'Astorga  of  Castile,  who  left  Spain  in  1085 
and  received  a  grant  of  lands  in  France.^  Among  the  D'Astorgas 
of  Spain  there  were  two  marquises  of  especial  note:  one,  viceroy 
of  Naples,  1672-5;  the  other  in  Napoleon's  time,  the  possessor  of 
more  than  thirty  marquisats  and  comtes.  ^  Heredity  would 
naturally  have  an  influence  upon  the  distribution  of  wealth. 

By  seventeen  years  of  age,  discontent  with  life  in  Waldorf  had 
moved  the  future  founder  of  the  estate  to  action.  *  He  "had  received 
but  a  rudimentary  education;  and  his  three  brothers  had  several 
years  before  left  home  to  seek  their  fortunes.  He  looked  to 
America  as  the  place  to  realize  his  ambitions,  and  laid  his  plans 
accordingly.  The  Revolutionary  War  was  then  in  progress;  and 
since,  in  addition,  Astor  did  not  know  our  language,  he  turned 
first  to  London  and  spent  three  preliminary  years  there.  These 
years  secured  him  fifteen  guineas,  a  new  suit  of  clothes,  practice 

1.  John  Jacob  Astor  of  New  York,  and  Wm.  Waldorf  Astor  of  Cliveden 
England. 

2.  Pall  Mall  Magazine,  June,  1899,  vol.  xviii,  p.  171,  Article,  John 
Jacob  Astor. 

3.  Larousse,  Dictionnaire  Universal ,  Title,  Astor ga. 

4.  The  general  story  of  J.  J.  Astor's  life  is,  where  not  otherwise  speci- 
fied, taken  from  Parton's  Lije  of  Astor,  1865. 


12  ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

in  the  sale  of  musical  instruments,  and  a  knowledge  of  the  English 
language  and  of  America. 

News  of  the  Treaty  of  Paris  came  in  the  autumn  of  1783; 
and  early  the  next  spring  Astor  landed  in  America.  He  showed 
already  two  characteristics:  keenness  of  observation  and  patience 
in  securing  results.  After  only  a  few  months  in  this  country  its 
opportunities  were  recognized,  —  "When  the  (Canadian)  frontiers 
are  surrendered  I  will  make  my  fortune  in  the  fur  trade."  ^  One 
can  easily  imagine  such  an  observer  learning  the  lesson  of  the 
unearned  increment  during  the  three  years  in  London.  He  showed 
his  patience  in  being  willing  to  spend  those  years  in  preparation  for 
life  here.  These  same  two  traits  stand  out  prominently  in  his 
career. 

§  2.  The  fortune  of  $20,000,000  which  Astor  succeeded  in 
amassing  before  his  death  in  1848  came  from  two  sources:  first, 
the  ftir  trade  and,  connected  more  or  less  therewith,  the  China 
trade;  second,  real  estate  investments  yielding  large  unearned 
increments.  It  was  the  fur  trade  that  yielded  him  his  first  hundred 
thousands;  but  these  earnings  invested  largely  in  real  estate  after 
1800  were  thus  increased  to  millions.  We  shall  discuss,  then,  the 
former  first;  it  was  the  basis  of  his  fortune,  and  occupied  his 
exclusive  attention  in  the  beginning. 

Astor,  immediately  after  his  arrival  in  this  countr>'  in  the 
spring  of  1 7  84/ purchased  furs  with  the  money  received  for  the 
fifteen  guineas  worth  of  musical  instruments  he  brought  over  with 
him;  and,  before  the  end  of  the  year,  he  had  made  a  hasty  return 
trip  to  London  to  dispose  of  his  furs  at  a  profit,  and  to  secure 
information  as  to  the  markets  for  that  article  in  Europe.^  His 
first  employment  in  the  United  States  was  to  beat  furs  at  two 
dollars  a  week  for  a  Quaker  trader  in  New  York  City,  But  the 
knowledge  he  acquired  of  skins  quickly  secured  for  him  an  advanced 
salary  as  buyer  in  Canada.  Soon  he  became  independent  and  set 
up  an  establishment  as  a  fur  merchant.  1  As  Parton  points  out, 
the  fur  trade  offered  exceptional  opportunities  to  such  a  man  as 
Astor.  While  it  was  a  most  profitable  business  and  permitted 
indefinite  expansion,  there  was  still  chance  for  small  beginnings,— 
the  purchase  for  a  trifle  of  a  few  skins  from  Indians  coming  to  the 
citv.  Y^Astor  was  pre-eminently  fitted  to  the  business;  he  worked 


1.  Chittenden,  History  oj  the  American  Fur  Trade  oj  the  Far  West,  1902, 
vol.  i,  p.  164. 

2.  Chittenden,  ibid.,  vol.  i,  p.  164. 


IN  THIS  COUNTRY.— THE  ASTORS.  13 

on  the  basis  that  knowledge  is  power;  he  knew  furs;  he  knew 
where  to  buy  them  cheapest;  he  knew  what  the  Indians  preferred 
in  exchange  fjand  he  was  notorious  as  a  close  bargainer. 

I  During  this  first  period,  1784- 1794,  Astor  was  evidently- 
successful  in  accumulating  considerable  capital  from  his  trading, 
because  in  the  latter  year,  following  the  Jay  treaty,  he  contracted 
with  the  Northwest  Company  of  Canada  to  ship  it  large  quantities 
of  furs  in  London.  The  treaty  in  question  was  a  great  boon  to 
American  traders.  The  British  military  posts  in  the  United  States 
territory  to  the  west  were  removed;  and  free  passage  into  the  rich 
fur-bearing  sections  of  Canada  was  permitted.  It  was  the  "sur- 
render of  the  frontiers"  after  which,  as  we  have  seen,  Astor  had 
prophesied  to  "make  his  fortune."^  '  He  extended  his  operations, 
and  bought  largely  in  Montreal  to  fill  his  contract  in  London. 
The  proceeds  of  sales  there  were  invested  in  English  cutlery  and 
woolens  to  be  sold  in  New  York.  In  this  way  one  dollar  spent  on 
goods  for  the  Indians  finally  brought  ten  in  New  York.  By  1798 
Astor  is  reputed  to  have  been  worth  $250,000;  and  in  1800  is  spoken 
of  as  "the  greatest  of  the  fur  merchants." 

Not  content  with  purchase  from  others  and  incidental  traffic 
with  the  Indians,  he  began  in  1807  direct' trade  with  the  red  men 
up  the  Mohawk;^  and  in  1808  organized  and  retained  a  half  interest 
in  the  American  Fur  Company,  intended  to  compete  on  a  large 
scale  with  the  strongly  established  Canadian  and  English  com- 
panies.J  Xewis  and  Clarke's  expedition  had  given  him  the  idea 
of  a  line  of  trading  posts  across  the  continent,  from  the  Great 
Lakes  to  the  Missouri  and  over  the  Rockies  to  the  Columbia. 
Vessels  on  the  Pacific  would  carry  the  furs  thence  to  China.  The 
story  of  the  trial  and  failure  of  this  great  conception  is  told  in 
Irving's  Astoria.  One  of  the  ships  sent  around  the  Cape  to  estab- 
lish the  colony  on  the  Columbia  was  lost  at  sea  in  18 10.  The 
post,  however,  was  located  and  garrisoned;  but  the  crew  of  another 
vessel  were  soon  afterwards  massacred  by  the  Indians;  and  the 
post  itself  was  surrendered  by  its  Canadian  commander  to  the 
British  in  18 13.  Astor  stood  his  loss,  and,  after  the  war,  was 
willing  to  go  into  the  venture  again;  but,  receiving  no  encourage- 
ment from  the  government,  he  let  the  matter  drop.  It  is  said  on 
good  authority  that  he  did  not  expect  large  profits  from  the  Astoria 

1.  Supra,  p.  12. 

2.  Encyclopedia  Americana,  Article,   Astor,  John  Jacob. 

3.  Chittenden,  ibid.,  vol.  i,  pp.  167-9. 


14       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

enterprise  for  twenty  years.  *  If  he  had  been  successful,  one  cannot 
tell  v/hat  a  fortune  he  v/ould  have  secured  from  the  enormous  land 
grant  he  expected,  as  well  as  from  the  Indian  trade;  but  the  very 
failure  shows  how  foresight  and  persistence  are  not  enough  without 
favoring  circumstances. 

The  American  Fur  Company  after  the  war  pushed  west  along 
the  Great  Lakes,  and  by  1817  covered  the  territory  about  the 
Lakes  and  on  the  Upper  Mississippi.  An  act  of  Congress  of  18 16, 
excluding  foreigners  from  the  United  States  fur  trade,  made  the 
company's  path  easier.  In  1822  it  was  also  established  on  the 
Missouri,  in  spite  of  considerable  opposition.^  Astor's  son  became 
president  of  the  company  in  1827,  but  left  it  before  the  death  of 
his  father.  ^ 

/Before  1800,  Astor  was  interested  in  the  China  trade.  He 
sent  furs  instead  of  money  to  that  country  in  exchange  for  tea,  a 
most  profitable  exchange,  since  it  was  then  the  greatest  fur  mart 
in  the  world.  The  same  native  shrewdness  made  this  business 
also  lucrative.  He  is  said  to  have  had  for  some  time  a  monopoly 
of  the  trade  in  sandalwood  betv/een  the  Hawaiian  Islands  and 
China.  He  discovered  the  demand  for  the  wood  in  China  by 
accident,  and  was  able  to  keep  it  secret.  He  had  a  million  dollars 
afloat,  or  a  fleet  of  twelve  ships,  by  1800,  according  to  his  great 
grandson.*  $35,000  was  the  normal  profit  on  a  single  voyage 
then,  and  Astor  is  said  to  have  cleared  $70,000  on  one  such  voyage. 
Several  of  his  ships  arrived  in  safety  during  the  war  of  18 12, 
returning  from  China  with  cargoes  of  tea;  and  since  at  the  time 
the  hostilities  had  greatly  increased  the  price  of  that  article, 
especially  large  profits  were  realized.  ^  As  a  result,  he  was  able  to 
bear  the  million  dollar  loss  in  connection  with  the  Astoria  enterprise 
without  great  inconvenience.  He  continued  in  the  trade  for  a 
number  of  years  after  the  war. 

I  Both  the  fur  trade  on  a  large  scale  and  commerce  with  China, 
involving  as  they  did  the  traversing  of  great  distances  with  the 
fatilty  communication  of  the  time,  the  dealing  with  people  where 
life  and  limb,  not  to  say  property,  were  not  always  safe,  the  sub- 

1.  Hunt's  Merchants'  Magazine,  August,  1844,  vol.  xi,  p.  153  at  p. 
158,  Article,  /.  J.  Astor. 

2.  Chittenden,  ibid.,  vol.  i,  pp.  311-20. 

3.  Depew,  ed.,  One  Hundred  Years  of  American  Commerce,  1895,  vol. 
ii>  P-    579  ^'t  P-  581,  Article,  The  Fur  Trade,  by  F.  F.  Gunther. 

4.  Pall  Mall  Magazine,  June,  1899. 

5.  Boston  Advertiser,  Mar.  31,  1848. 


IN  THIS  COUNTRY.— THE  ASTORS.  •  15 

jection  to  constant  delays  and  interferences  by  peace  or  war,  or 
change  of  polity,  and  the  need  of  considerable  capital,  offered 
great  profits  and  correspondingly  great  risks.  jAstor  secured  his 
full  share  of  the  profits,  and  by  shrewd  management  avoided 
many  of  the  possible  losses.  Numerous  stories  are  told  to  illustrate 
his  reputation  for  shrewdness.  At  a  time  when  no  ship  could 
leave  American  ports  for  China,  Astor  loaded  one  with  the  necessary 
articles,  found  a  Chinaman  in  New  York,  dressed  him  as  a  noble 
of  that  country  and  sent  him  to  Washington,  where  the  Chinaman 
demanded  that  the  government  send  him  home  at  once.  When 
the  authorities  inquired  for  a  vessel  to  take  him,  Astor  was  ready; 
and  an  exceedingly  profitable  voyage  resulted. 

§  3.,  While  Astor  is  reputed  to  have  gained  some  two  million 
dollars  m  these  ways,  the  investment  of  his  returns  in  real  estate 
v\^as  by  far  his  best  paying  field  of  operations,  and  increased  his 
fortune  to  $20,000,000  before  his  death.  The  general  lines  oUiis-. 
investments  are  fairly  clear.  Property  in  the  built-up  section  of 
the  City  of  New  York  he  would  often  sell  rather  than  buy.  But 
farms  and  unoccupied  land,  in  what  were  then  suburban  or  even 
rural  districts  higher  up  the  island,  he  purchased  on  every  occasion, 
and  at  farm  or  suburban  prices.  He  had  an  unconquerable  faith 
in  the  future  development  and  expansion  of  New  York  City;  and 
with  the  patience  of  one  sure  of  himself  and  willing  to  wait,  he 
deliberately  disregarded  present  returns  on  his  investments  in  the 
shape  of  rent,  for  the  sake  of  the  unearned  increment.  ,Mr.  Hend- 
rick,  who  has  evidently  examined  the  real  estate  records,  tells  of 
"dozens  of  lots"  bought  by  Astor  on  lower  Broadway  for  $200  to 
$300  v/hich  are  now  worth  $300,000  to  $400,000;  also  of  an  East 
side  farm  which  cost  $20,000  and  now  would  be  a  fortune  of 
$8,000,000.  ^  He  secured  one-half  of  Governor  Clinton's  estate 
for  $75,000,  the  annual  incom.e  from  which  today  is  five  times  that 
amount.^  A  farm  bought  in  1811  for  $4,500,  in  1899  was  worth 
$7,000,000.^  Aaron  Burr,  being  heavily  in  debt,  in  1804  sold 
the  62-year  lease  of  Richmond  Hill,  which  he  held  from  Trinity 
Church,  to  Astor  for  $160,000.  It  was  soon  yielding  $25,000  a 
year,  having  become  a  desirable  residence  district.  ^ 


1.  Burton  J.  Hendrick,  The  Astor  Fortune,  McClure's  Magazine,  April, 
1905,  vol.  xxiv,  pp.  563-78. 

2.  Pall  Mall  Magazine,  June,  1899.     Article  by  W.  W.  Astor. 

3.  Biarton  J.  Hendrick,  The  Astor  Fortune,  McClure's  Magazine,  April, 
1905. 


16       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

L  Astor  evidently  was  not  content  with  such  property  as  naturally 
fell  into  his  hands.  He  pursued  with  relentless  energy  whatever 
he  wanted^:  Money  was  loaned  on  mortgages,  which  were  fore- 
closed at  favorable  opportunities.  During  the  war  of  1812,  and 
especially  at  the  crisis  of  1837,  Hendrick  says,  Astor  was  busy  as 
at  a  harvest,  foreclosing  on  and  buying  in  at  a  low  figure  the 
property  of  hard-pressed  debtors.  During  the  latter  period  he 
was  complainant  in  sixty  cases. 

His  ability  in  obtaining  land  is  shown  in  the  cases  of  the 
Morris  estate^  and  the  Philipse  Manor ^  in  Dutchess  and  Putnam 
counties.  New  York,  the  latter  containing  about  800  square  miles. 
He  discovered  that  while  the  former  holders  had  been  attainted 
during  the  Revolutionary  War,  yet  the  heirs  to  the  two  estates 
had  a  valid  claim  to  title.  This  he  bought  at  a  low  figure;  and 
the  courts  sustained  his  claim,  to  the  great  discomfiture  especially 
of  those  living  on  the  former  well-settled  property  in  the  belief 
that  it  was  theirs.  The  title  to  the  Morris  estate  was  purchased 
by  the  state  for  $500,000,  five  times  what  Astor  paid  for  it.  The 
manor  was  parceled  and  sold  at  a  large  advance  before  1822. 

Astor  was  not  only  expert  in  securing  such  property  as  he 
wanted;  he  also  knew  how  to  keep  it.  True,  the  country  estates 
above-mentioned  were  sold,  as  was  some  property  in  the  city ;  but 
the  fact  that  a  great  part  of  the  original  farms  purchased  early  in 
the  century  are  today  held  in  the  family,  testifies  strongly  to  his 
tenacity  and  his  realization  of  the  possibilities  of  the  unearned 
increment. 

It  is  not  clear  how  far  Astor  aided  in  the  improvement  of  his 
land — as  regards  his  successors  we  know  more.  It  is  stated, 
however,  that  he  would  not  build  on  his  property,  but  only  lease 
it,  letting  the  lessee  put  up  the  house,  which  reverted  to  Astor 
when  the  lease  expired.  ^  It  seems  a  short-sighted  policy  for  one 
of  Astor's  capacity;  yet  he  had,  according  to  Parton,  a  streak  of 
closeness  that  often  stood  in  his  way  and  might  well  have  led  him 
to  jusjt^ch  a  course.  ,^ 

I  Astor  had  a  keen  eye  for  the  future,  energy  and  patience.   7 
The  purchase  of  United  States  securities  during  the  war  of  18 12 
at  60  to  70,  which  rose  later  to   120,  was  typical  of  him.*LHe 
was,  perhaps,  as  great  a  trader  as  a  land  speculator;  but  the  lattei 

1.  Parton's  Lije  of  Astor,  1865,  pp.  62-66. 

2.  N.  Y.  Tribune,  Jan.  17,  1887.  « 

3.  B.  J.  Hendrick  in  McClure's  Magazine,  April,  1905, 

4.  The  Boston  Advertiser,  Mar.  31,  1848. 


IN  THIS  COUNTRY.— THE  ASTORS.  17 

field  offered  much  the  greater  reward.  He  left  his  son  one  of  the 
largest  fortunes  of  the  day,  invested  in  secure  form,  and  a  still 
more  valuable  tradition  and  precedent  for  its  management. 

§  4.  William  B.  Astor  was  born  in  1792,  and  until  sixteen 
years  of  age  attended  the  public  schools  of  this  country  and 
assisted  his  father  in  the  fur  and  shipping  business.  ^  But  John 
Jacob  wanted  a  thorough  education  for  his  son,  which  he  believed 
was  not  to  be  obtained  on  this  side  of  the  Atlantic.  He  was, 
therefore,  sent  to  Heidelberg  to  complete  his  schooling.  ^  On  his 
return,  the  son  naturally  entered  business  with  his  father;  and, 
as  the  latter  retired  from  an  active  interest  in  affairs  some  twenty- 
five  years  before  his  death,  William  Astor  had  a  long  experience 
in  the  management  of  the  estate  before  the  twenty  millions  came 
into  his  hands  in  1848.  His  Uncle  Henry,  dying  childless  some 
time  previously,  had  also  left  his  fortune  of  $500,000  to  his  nephew.  ^ 

The  second  Astor  did  not  inherit  his  father's  aptitude  for 
trade.  He  was,  however,  a  hard  worker,  and  paid  close  attention 
to  business  and  to  the  amassing  of  the  fortune  throughout  his  life. 
His  investments  were  safe  rather  than  speculative.  The  Spectator 
calls  him  "the  supreme  example  of  the  beaver  capitalist."*  He 
did  not  have  his  father's  reputation  for  driving  a  hard  bargain; 
he  paid  well,  and  seems  to  have  attached  men  to  his  service.  * 

W.  B.  Astor  had  only  a  life  interest  in  the  property,^  since 
the  founder  of  the  estate  had  devised  it  to  his  grandchildren, 
leaving  merely  the  management  and  income  to  his  son.  The  money 
thus  received,  however,  was  carefully  used  to  acquire  more  real 
estate,  to  put  up  houses  and  to  purchase  shares  of  sound  corpora- 
tions. He  bought  many  lots  below  Central  Park  between  Fourth 
and  Seventh  avenues, ''  but  was  more  of  a  builder  than  his  father. 
Between  i860  and  1873  his  surplus  capital  was  largely  used  to 
put  up  houses  on  improved  but  vacant  land  he  possessed,  till  most 

1.  N.  Y.  Times,  Nov.  25,  1875. 

2.  Ibid. 

3.  London  Times,  Dec.  13,  1875. 

4.  London  Times,  Dec.  14,  1875 

5.  Ihid. 

6.  The  residuary  clause  in  J.  J.  Astor's  will  leaves  his  son  William  B. 
Astor  a  life  estate  in  the  residue,  with  power  of  appointment  among  his 
children  and  their  issue.  Parton,  Life  of  Astor,  1865,  pp.  97-98.  Parton 
estimates  the  dispositions,  aside  from  the  residue,  at  two  millions.  Ihid., 
p.  83. 

7.  N.  Y.  Tribune,  Nov.  25,  1875. 
B 


18       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

of  it  was  built  up.  ^  He  is  said  to  have  owned  nearly  i,ooo  houses 
at  the  time  of  his  death  in  1875.  "^^  '^  landlord  he  gained  the 
reputation  of  a  prompt,  obliging,  businesslike  man."  ^  His  security 
investments  were  chiefly  in  railroads  and  coal  companies.  Among 
these  were  the  New  York  Central  and  Hudson  River,  Harlem, 
New  York  and  New  Haven,  Pennsylvania,  Delaware,  Lackawanna 
and  Western  -  and  Illinois  Central.  He  did  not  serve  as  director 
in  any  of  these,  but  left  that  office  to  his  son.^  Considering  the 
manner  in  which  most  of  these  stocks  rose  in  value  following  this 
early  period  of  probation,  one  would  say  that  he  had  as  much  of 
an  eye  for  future  increases  of  value  in  whatever  form  of  property 
they  occurred  as  had  his  father. 

W.  B.  Astor  had  control  of  the  estate  for  twenty-seven  years, 
1 848- 1 875;  and  during  this  period  it  is  supposed  to  have  increased 
from  $20,000,000  to  $55,000,000.^  It  was  a  time  of  general  growth 
and  prosperity;  and  John  Jacob  Astor's  will  providing  that  the 
property  be  preserved  intact  till  his  son's  death,  per  se,  insured  a 
large  increase  in  the  estate.  Added  to  this  was  the  son's  constant 
and  industrious  management  of  the  property  and  his  careful  and 
intelligent  investment  of  the  proceeds.  As  a  result  the  foitune 
passed  not  only  unscathed  but  rather  greatly  increased  through 
the  critical  second  generation. 

§  5.  Two  sons  inherited  the  bulk  of  this  vast  sum,  or  rather 
a  life  interest  in  it,^  for  the  estate  was  again  left  to  the  grand- 
children. The  elder  son,  John  Jacob  II,  received  two-thirds;  the 
younger,  William,  one-third.  ■*  [The  family  tradition  as  to  its 
management,  now  well  established,;  continued  to  be  followed. 
Purchases  in  anticipation  of  popular  demand  were  made  well 
up  town,  along  Harlem  River  and  on  the  Riverside  Drive^*  John 
Jacob  Astor  II 's  last  purchase  before  his  death  in  1890  was  on 
Third  avenue  between  66th  and  67th  streets.  *  With  the  subse- 
quent increase  of  values  in  those  localities  they  reaped  their  harvest. 
$6,000,000  is  said  to  have  been  kept  on  deposit  available  for  any 
real   estate    opportunity    that   might    come   up.  ®     Their   father's 

1.  N.  Y.  Tribtme,  Nov.  25,  1875. 

2.  Ibid. 

3.  The  figures,  $45,000,000  and  $55,000,000,  are  mentioned  in  the 
London  Times,  Dec.  14,  1875,  and  Feb.  25,  1890.  They  are  more  conserva- 
tive than  the  $100,000,000  estimate  in  the  N.  Y.  Times,  Nov.  25,  1875. 

4.  N.  Y.  Times,  Feb.  23,  1890. 

5.  N.  Y.  Herald;  Feb.  23,  1890. 

6.  N.  Y.  World,  Feb.  23,  1890. 


IN  THIS  COUNTRY.— THE  ASTORS.  19 

safe  policy  of  security  investments  v/as  also  followed.  The  Herald 
in  1890^  outlines  it: 

"The  Astors  have  for  twenty-five  years  been  among  the 
largest  purchasers  of  the  city's  sinking  fund  securities.  .  .  .  They 
also  own  nearly  the  entire  issue  of  the  Columbus  and  Hocking 
Coal  Company's  bonds  and  a  part  of  the  stock  of  about  every  old 
bank  in  the  city.  J.  J.  Astor  bought  conservatively  of  a  large 
number  of  well-paying  securities,  which,  while  not  gilt-edged,  paid 
bigger  dividends  than  government  or  other  similar  bonds.  Among 
other  companies  the  bonds  of  which  he  held  were  Delaware  and 
Lackawanna,  Western  Union  and  insurance  stocks.  He  was  one 
of  the  principal  owners  of  the  United  States  Trust  Company." 

This  older  son  was  a  soldier  in  the  Civil  War,  was  interested 
in  politics,  and  pursued  a  progressive  business  policy.  The  Real 
Estate  Exchange  of  New  York  City  at  the  time  of  his  death  paid 
him  the  following  tribute: 

"In  his  relations  with  the  real  estate  market  Mr.  Astor  held 
an  almost  unique  position.  He  was  a  large  buyer,  but  he  rarely 
sold.  His  wealth  was  liberally  used  in  the  building  up  of  the 
neighborhoods  where  he  was  an  owner.  His  rent  roll  was  the 
largest  in  the  city,  and  his  name,  as  a  landlord,  was  a  synonym 
for  liberality  and  good  faith.  "^ 

The  $35,000,000  he  is  supposed  to  have  received  from  his 
father,  in  fifteen  years  he  increased  to  a  reputed  $75,000,000.^ 

His  son,  William  Waldorf  Astor,  inherited  this  in  1890.  He 
was  born  in  1848,  studied  abroad,  took  the  law  course  at  Columbia, 
and  practiced  in  New  York  for  several  years,  acquiring  knowledge 
and  experience  preparatory  to  the  management  of  the  estate.  * 
His  cousin,  John  Jacob  Astor  III,  a  graduate  of  Harvard,  traveler, 
author,  inventor,  and  director  in  numerous  companies,  ^  inherited 
the  smaller  portion  of  the  estate  from  William  Astor.  Under  these 
two  men  the  fortune  has  flourished.  Some  property  in  the  lower 
part  of  the  city  has  been  sold:  the  old  Astor  homestead,  585  Broad- 

1.  Feb.  23,  1890. 

2.  N.  Y.  Tribiine,  Mar.  5,  1890. 

3.  N.  Y.  Tribune,  Feb.  23,  1890. 

4.  N.  Y.  Tribune,  May  21,  1893. 

5.  H.  H.  Lewis,  The  Quiet  Control  of  a  Vast  Estate,  World's  Work, 
Nov.,  1902,  vol.  V,  p.  2750.  He  gives  the  following  list  of  companies  in 
which  J.  J.  Astor  III  was  director  at  the  time:  V\/^estem  Union,  Equitable 
Life,  New  York  Life,  Illinois  Central,  Mercantile  Trust  Co.,  Title  Guarantee 
and  Trust  Co.,  Astor  National  Bank,  Plaza  Bank,  National  Park  Bank, 
Delaware  and  Hudson  Company. 


20       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

way,  went  in  1893;^  in  1898,  forty  tenements  near  First  avenue 
and  Fifth  street  were  disposed  of.  ^  Purchases  of  large  tracts  in 
the  Bronx  have  been  made.  Money  has  been  spent  freely  for 
improvements;  witness  the  hotels  Waldorf-Astoria,  Knickerbocker, 
St.  Regis,  etc.,  and  the  large  apartment  houses  which  have  gone 
up.  In  1905  Henry  Clews  estimated  W.  W.  Astor's  fortune  at 
$200,000,000,  and  J.  J.  Astor  Ill's  at  $75,000,000.^ 

The  following  table  shows  the  reputed  increase  in  the  Astor 
wealth  to  1905: 

J.  J.  Astor  I  (1763- 1848)  Henry  Astor  left 

left  life  interest  in  $500,000  to 

1848  $20,000,000  to 


W.  B.  Astor  (1792-1875)  who  left  a  life 
1875  interest  in  $55,000,000 


$35,000,000  to  J.  J.  Astor  II  $20,000,000  to  Wm. 

(182 2- 1890)  who  left  Astor  (         -1892) 

1890  $75,000,000  to  who  left  his  estate  to 

W.  W.  Astor  (1848-         )  J.  J.  Astor  III       (1864-         ) 

1905       who  had  $200,000,000  who  had  $75,000,000 

in  1905  in  1905 

§  6.  Several  fortunes  almost  as  large  or  larger  than  the 
Astors'  have  been  acquired  in  less  than  half  the  time;  but,  as  we 
noted  at  first,/ stability  of  increase  rather  than  rapidity  is  the 
characteristic  oT  Astor  wealth.  The  ways  in  which  this  has  come 
about  3.re  perhaps  clear.  A  beginning  was  made  by  John  Jacob 
Astor  in  a  characteristically  American  way,-?— through  shrewdness 
and  pluck  in  fields  of  enterprise  then  opeii  to  a  trader;  but  the 
means  since  used  by  him  and  his  successors  to  "found  and  per- 
petuate a  family"  resemble  the  customs  of  Europe's  wealthier 
class  as  much  as  anything  typically  American.  The  estate  was 
first  put  into  a  permanent  form,  land  and  safe  securities,  and  has 
so  remained]     Its  dissipation  has  been  prevented  by  leaving  the 

1.  N.  Y.  Tribune,  Aug.  5,  1893. 

2.  N.  Y.  Tribune,  May  15,  1898.  'The  secret  (of  this  sale  of  tenements) 
probably  is  that  he  will  reinvest  in  other  real  estate,  as  these  were  becoming 
less  remunerative  and  needed  improvement.' 

3.  Chicago  Record-Herald,  Jan.  21,  1906. 


IN  THIS  COUNTRY.— THE  ASTORS.  21 

great  bulk  to  one  son,  except  for  the  division  in  1875,  ^7  the 
devising  of  a  Hfe  estate  only  to  the  children  by  the  first  two  genera- 
tions, and  by  the  education  of  the  son  in  a  way  to  prepare  him 
for  care  of  the  property,  and  by  the  growth  of  a  "family  tradition" 
to  guide  him.  What  is  more  a  question  of  blood,  there  has  been  a 
"conserving  genius  in  each  generation."*  c'^^^  faculty  of  judging 
accurately  of  the  future,  of  making  safe  and  remunerative  invest- 
ments from  the  long-time  standpoint,  and  of  avoiding  great  specu- 
lative losses,  seems  to  have  been  present  to  a  considerable  degree 
in  each  member  of  the  house,   j 

Such  qualities,  lasting  over  a  century,  would  have  secured  a 
family  considerable  wealth  almost  an^here  under  free  institutions 
and  in  times  of  peace  and  order.  [That  the  fortune  has  reached 
such  an  enormous  figure,  however,  must  be  assigned  to  conditions 
favoring  a  general  great  increase  of  wealth  in  this  country,  and 
more  especially  to  the  particular  causes  which  have  built  up  New 
York  City.  ^1  John  Jacob  Astor  might  have  seen  in  imagination  a 
London  oTIthe  eighteenth  century  on  Manhattan  Island;  he  could: 
not  have  foreseen  New  York  of  today.  '  Rapid  transit,  high  build- 
ings, ^  the  great  port  of  entry  made  possible  by  the  increased 
commerce  of  steam — these  are  some  later  developments  which, 
incidentally,  have  given  many  of  their  millions  to  the  Astors. 


1.  H.  H.  Lewis  in  the  World's  Work,  Nov.,  1902. 

2.  Cf.  B.  J.  Hendrick,  in  McClure's  Magazine,  April,  1905 


CHAPTER  II. 

ulfje  Jfortune  of  f .  f.  Ilill 

§  I.  The  second  fortune  chosen  for  the  study  of  the  process 
of  accumulation  was  that  of  J.  J.  Hill.  Although  Mr.  Hill  is  nov/ 
so  closely  associated  with  the  railways  of  the  Northwest  and 
although  his  wealth  originated  in  connection  with  them  and  has 
grown  chiefly  from  the  same  source,  yet  he  was  thirty-nine  years 
of  age^and  had  been  twenty  years  in  the  West  before  he  took  the 
step  which  brought  him  into  prominence  as  a  railroad  man.  After 
a  glance  at  these  twenty  preliminary  years,  we  may  take  up  his 
enti*ance  into  railroad  management  and  into  the  millionaire  class. 
A  discussion  follows  of  the  subsequent  constant  enlargement  of 

,  his  field  of  operations  resulting  in  an  ever  growing  fortune  until 

he  becomes  the  great  factor  in  the  business  world  which  he  is  today. 

I  We   may   then    conclude    with    an    examination    of   the    miCthods 

/  characteristic  of  him  as  a  railroad  man  which  have  contributed 

(largely  to  his  fortune. 

§  2.  It  is  necessary  to  go  back  for  a  beginning  to  the  decade 
before  the  Civil  War,  to  the  time  of  rapid  and  feverish  inrush  of 
settlers  from  the  East  into  the  Mississippi  Valley.  The  more 
active  men  did  not  stop  with  Illinois  or  Iowa,  but  pushed  on. 
Some  went  to  Kansas  to  save  it  for  the  North;  others  passed  up 
the  convenient  "Father  of  Waters"  to  where,  in  the  forest  and 
among  the  Indians,  they  founded  towns  and  cleared  up  farms  and 
made  of  Minnesota  Territory  a  state.  ^  The  steamboat  lines  on  the 
upper  Mississippi  were  heavily  laden  in  the  early  fifties  with 
passengers  and  freight.  During  the  summer  011856  one  of- these 
steamers  brought  James  J.  Hill  to  the  new  and  "booming  town  of 
St.  Paul.     He  was  a  young  man  of  eighteen,  with  brains  and  brawn 


1.  Mr.  Hill  was  bom  near  Guelph,  Ontario,  Sept.  16,  1838. 

2.  Minnesota  was  organized  as  a  territory  in  1S49,  and  became  a  state 
in    1858.     The  following  shows  its  growth: 

Minnesota  1850         i860  1870  1880  1890  1900 

Population:  6,077      172,023      439,706     780,773      1,301,826      1,751,394 

Rankin  Union:     36  30  28  26  20  19 

Twelfth  Census,  Population,  vol.  i,  pp.  2-3. 


IN  THIS  COUNTRY.— J.  J.  HILL.  23 

but  no  money,  who  had  come  from  his  home  in  southern  Ontario 
to  grow  up" with  the  West.] 

His/ first  employment  was  to  handle  freight  on  the  levee  for 
the  various  steamboat  companies.  ^  He  was  reliable  and  indus- 
trious, and  if  necessary  would  work  overtime,  f  This  policy  brought 
its  follower  sixty-five  dollars  a  month  where'  others  were  getting 
thirty.  ^  We  find,  what  might  be  expected  from  a  man  of  this 
stamp,  that,fn  t866  he  secured  and  held  for  two  years  an  exclusive 
contract  witH  the  St.  Paul  and  Pacific  Railroad  for  transferring 
shipments  between  its  depot  and  the  river..  He  also  dealt  in  coal, 
and  was  the  first  one  to  bring  that  article  "to  St.  Paul. 

The  prosperous  year,  1870,  was  the  occasion  for  Mr.  Hill's 
entering  on  a  larger  venture, — a  line  of  steamers  on  the  Red  River 
from  Moorhead,  Minnesota,  to  Winnipeg.  As  the  former  point  v/as 
the  western  terminus  of  the  Northern  Pacific,  through  connection 
between  St.  Paul  and  Winnipeg  was  obtained.  He  encountered 
competition  from  the  beginning,  since  Norman  W.  Kittson,  agent 
of  the  Hudson  Bay  Company  at  St.  Paul,  had  at  the  time  a  steamer 
on  the  sarns.  river.  The  next  year,  however,  the  two  lines  con- 
solidated. I  Mr.  Hill  was  gaining  years  of  experience  in  transporta- 
tion as  preparation  for  his  later  work,] 

Meanwhile  the(,  country,  checked  in  its  growth  by  the  Civil 
War,  began  again  to  expand;  and  population  pushed  west  with  new 
and  irresistible  vigor.  The  great  fertility  of  the  soil  in  these  new 
regions  was  becoming  more  and  more  widely  known.  Such 
things  did  not  escape  Mr.  Hill's  attention.  He  was  studying  the 
country, ^nd  from  personal  observation^  and  in  other  ways(gained 
great  "knowledge  of  the  character  of  the  soil  in  different  districts, 
the  rainfall,  temperature  and  other  matters  of  climate.  It  was 
on  the  basis  of  such  knowledge  of  these  fundamental  character- 
istics that  he  could,  after  accurately  judging  the  possibilities  and 
necessary  future  of  the  country,  appreciate  its  needs  and  assist 

1.  The  St.  Paul  Pioneer  Press,  Dec.  15,  1905,  in  a  speech  by  Joseph 
McKibbin  on  "Mr.  Hill  and  the  Northwest." 

2.  Mr.  T.  B.  Walker,  of  Minneapolis,  who  knew  him  at  the  time,  tells 
this. 

3 .  He  tells  of  traveling  alone  through  the  fertile  regions  of  northwestern 
Minnesota  when  there  were  no  houses  for  a  hundred  miles.  In  the  ruts  of 
the  roads  of  the  Red  River  Valley  where  the  wagon  wheels  had  broken  up 
the  ground,  the  grass  was  growing  to  a  great  height.  Mr.  Hill  saw  in  this 
an  indication  of  what  the  land  would  yield  if  cultivated;  and  he  judged 
rightly  therefrom  as  to  the  possibility  of  agriculture  in  this  region  as  opposed 
to  those  who  held  it  to  be  too  wet  and  sour. 


24  .      ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

its  development  in  a  very  intelligent  way.  In  brief,  what  it 
required  was  that  the  current  of  population  moving  westward 
along  lines  of  least  resistance,  waterways  and  railways,  be  turned 
north  Jnto  the  fertile  valley  of  the  Red  River.  A  railroad  was 
needed.! 

§  3.  But  at  this  time  came  the  crisis  of  1873,  and  following 
it,  several  years  of  depression.  One  of  the  numerous  concerns 
which  failed  was  J.  Cooke  &  Company,  of  Philadelphia,  who  had 
in  charge  the  finances  of  the  fragmentary  St.  Paul  and  Pacific. 
With  this  support  removed,  building  on  the  line  practically  stopped, 
and  part  of  it  passed  into  the  hands  of  a  receiver.  ^  The  name 
and  bonded  debt  were  the  biggest  things  about  the  road.  There 
were  but  383  miles  of  track:  the  line  to  Breckenridge  on  the  western 
boundary  of  Minnesota  was  207  miles;  another  branch  from  St. 
Paul  up  the  Mississippi  and  then  west  a  short  distance  added  iii 
miles;  and  an  isolated  section  in  the  north  of  the  state  completed 
the  existing  road.  ^  Yet  bonds  for  a  par  value  of  over  $25,000,000 
had  been  issued  by  the  road,  and  were  held  chiefly  in  Holland. 
The  State  of  Minnesota  had  provided  for  the  line  a  land  grant,  of 
which,  in  1879,  there  still  remained  unsold  nearly  2,000,000  acres ;^ 
but  an  act  passed  early  in  1878  declared  much  of  this  forfeit  if 
the  track  were  not  all  down  before  January  i,  1880.'*  The  St. 
Paul  and  Pacific  was  in  a  state  of  collapse.  Net  earnings  on  the 
main  division  for  the  years  1872-5  varied  between  $32,000  and 
$77,000,  and  in  1876  and  1877  recovered  to  but  $220,000  and  fell 
again  to  $139,000;  and  while  the  branch  line  showed  a  better 
average,  the  highest  mark  it  reached  during  the  whole  period  was 
$152,000.*  Sections  of  the  road  were  operated  only  a  part  of 
the_year;  and  practically  no  interest  could  be  paid  on  the  bonds. 
/  [^  But  Mr.  Hill  saw  in  those  incomplete  pieces  of  track,  which 
had  impoverished  their  owners,  possibilities  of  a  great  future,  for 
here  was  the  needed  railroad.  /  The  worst  of  the  crisis  was  now 


1.  The  Financial  and  Commercial  Chronicle,  July  5,  1879,  quoting  from 
a  current  number  of  the  St.  Paul  Pioneer  Press.  Hereafter  the  former 
paper  will  be  referred  to  merely  as  the  Chronicle. 

2.  Poor's  Manual,  1878,  pp.  785-7. 

3.  This  was  the  amount  of  land  behind  the  first  mortgage  bonds  issued 
by  the  road,  the  St.  Paul,  Minneapolis  and  Manitoba,  which  later  bought 
the  St.  Paul  and  Pacific  (cf.  p.  27),  and  evidently  was  all  that  was  handed 
over  ill  that  transaction.  Vide  Poor's  Manual  as  in  note  2,  for  a  partial 
statement  of  the  land  of  the  St.  Paul  and  Pacific. 

4.  The  Chronicle,  July  5,  1879. 

.  5.  Poor's  Manual,  1880,  pp.  828-9. 


IN  THIS  COUNTRY.— J.  J.  HILL.  25 

past;  and  extension  of  the  road  would  not  only  secure  the  land 
grant  from  the  state,  a  minor  matter,  but  would  be  followed  by 
a  great  inrush  of  settlers  and  by  general  prosperity. 

Mr.  Hill  resolved  to  buy  up  the  line.  ^  But  he  and  his  partner 
in  the  steamboat  business,  Mr.  Kittson,  did  not  have  the  capital 
needed  to  secure  control  of  this  property  which  seemed  so  very 
desirable  to  them.  Moreover,  at  this  time  (1876)  Canada  was 
on  an  assured  gold  basis,  while  in  the  United  States  greenbacks 
were  the  currency  with  gold  at  a  premium ;  and  the  former  country 
for  this  reason  enjoyed  better  credit  abroad.  The  Dutch  bond- 
holders in  control  of  the  road  would  sell  more  willingly  and  at 
better  terms  to  a  Canadian,  and  had  inquired  ofl^ponald  Smith, 
the  Hudson  Bay  Company's  agent  at  Winnipeg,  if  he  were  inter- 
ested in  the  prospective  purchase.  He  told  Mr.  Hill  about  this 
inquirv^;  and  the  latter  then  proceeded  to  enlist) both  him  and 
Mr.  Stephen,  president  of  the  Bank  of  Montreal,  in  the  enterprise.' 

This  successful  enlistment  was  a  crucial  point  in  Mr.  Hill's 
career.  Without  such  assistance  he  could  have  done  comparatively 
little.  This  gave  the  opportunity  to  demonstrate  his  ability  as  a 
railroad  manager;  and  since  then  the  growth  of  his  fortune  has 
been  in  large  part  the  result  of  that  ability.  No  doubt,  capital 
might  have  been  obtained  elsewhere;  but,  as  above  mentioned, 
it  was  desirable  to  have  Canadians  interested  in  the  road;  and,  at 
any  rate,  it  was  necessary  to  find  someone  not  only  with  confidence 
in  the  affair,  but  also  with  capital.  It  is  difficult  to  analyze  the 
motives  inducing  a  person  to  invest  in  a  venture.  The  capitalists' 
own  knowledge  of  the  situation  in  the  West  and  of  Mr.  Hill's 
fitness  to  handle  it,  were  probably  the  chief  motives  in  the  present 
case;  and  yet  his  personal  statement  of  the  proposition  could 
hardly  fail  to  be  a  factor  in  bringing  about  the  final  decision.  If  \ 
this  be  true,  then  Mr.  Hill's  power  of  convincing  others  that  he 
would  be  successful  has  been  a  cause  of  his  success. 

The  four  men,  Messrs.  Hill,  Kittson,  Smith  and  Stephen, 
each  contributed  his  quarter  to  a  pool  for  buying  control  of  the 
road,  of  which  the  amount  actually  used  was  about  $1,000,000.^ 

1.  No  doubt  some  such  idea  was  in  Mr.  Hill's  mind  many  years  before  its 
realization;  but  a  definite  plan  seems  to  have  taken  shape  about  1876.  This 
is  the  date  given  by  Mr.  Farley  in  Farley  v.  Kittson,  120  U.  S.  303  at  304. 
For  the  final  decision  of  this  case,  see  150  U.  S.  572. 

2.  Statement  by  Mr.  Hill. 

3.  Mr.  Hill  thus  invested  $250,000,  which  was  probably  the  major 
portion  of  what  he  had  made  up  to  date  as  freight  handler,  coal  dealer,  and 
part  owner  of  a  small  steamboat  line. 


26 


ECONOMIC  CAUSES  OF  LARGE  FORTUNES 


After  some  bargaining,  an  agreement  was  reached  with  the  bond- 
holders, February  8,  1878,'  whereby  85  per  cent  of  the  bonds 
of  the  St.  Paul  and  Pacific,^  v/hose  total  par  value  approximated 
$27,000,000,^  and  which,  with  accrued  interest,  represented  a 
still  larger  debt,  were  obtained  for  from  $7,000,000  to  88,000,000.^ 

ST.  PAUL  AND  PACIFIC  BONDS." 


I 

II 

III 

IV 

Name  of  Bond 

Amotint 
Outstanding 

Quotation,  N.Y. 

Stock  Exchange 

Sept.  28,  1877 

Bid 

Purchase 

Price 

Feb.  8, 

1878 

ist  sec.  7% 

81,096,000 
1,700,000 
5,700,000 
1,114,000 

15,000,000 

45  H 

18 

20 

6% 

75 
30 
35 
28 

13% 

2d  sec.  7% 

Bonds  of  1869 

Consolidated 

St.   Vincent  &   Brainerd  exten- 
sion   

Total 

$24,610,000 

The  purchasers  intended  to  coinplete  the  foreclosure  proceed- 
ings already  begun  as  soon  as  practicable  and  organize  a  new 
company  to  take  over  the  road;  and  their  agreement  with  the 
sellers  provided  that  "payment  for  the  bonds  bought  shall  be  made 
six  months  after  the  foreclosure  at  the  option  of  the  buyers  in  gold 
coin,  in  7  per  cent  gold  bonds  of  the  new  company  at  par  with  a 
premium  of  $250  preferred  stock  for  each  Si, 000  bond,  or  in  the 
same  bonds  at  90  without  the  stock  premium."*  The  Dutch 
holders  were  willin?  enousfh  to  sell  control  of  what  was  to  them  a 


1.  The  Chronicle,  Aug.   10,   1878. 

2.  Statement  by  Mr.  Hill. 

3.  Cf.  Column  II  of  above  table.  The  table  does  not  include  two  small 
issues  of  $120,000  and  $366, oqo,  on  which  interest  had  been  paid  and  which 
were  apparently  not  bought  up  by  Mr.  Hill  and  his  associates,  nof  a  fourth 
mortgage  on  the  main  line  of  $1,500,000  outstanding.  These  make  the 
total  $26,596,000. 

4.  Column  III  was  found  in  the  quotations  of  the  Chronicle  given 
Sept.  29,  1877.  The  issue  of  Aug.  10,  1S78,  gives  the  purchase  price  of 
Column  IV,  the  figure  13%  being  a  correction  made  by  Mr.  Hill.  The 
Investors'  Supplement  of  the  Chronicle  for  Jan.  26,  1878,  was  consulted  for 
Column  II.  This  was  about  the  time  of  the  purchase.  The  bond  issues 
mentioned  in  note  3  are  not  given,  as  their  purchase  price  was  not  found. 

5.  The  Railroad  Gazette,  March  22,   1878. 


IN  THIS  COUNTRY.— J.  J.  HILL.  27 

"white  elephant"  in  the  frozen  north/  at  over  60  per  cent  in 
advance  of  the  market  price  of  the  securities  in  question.  ^  On 
the  other  hand,  considering  the  privilege  of  paying  in  bonds  and 
the  subsequent  value  of  the  property  it  was  a  great  bargain  for 
the  purchasers. 

No  time  was  lost  after  control  of  the  road  was  gained.  Re- 
organization was  delayed,  as  foreclosure  required  time;  but  the 
receiver  of  the  St.  Vincent  and  Brainerd  extension,^  with  the 
authority  of  the  bondholders  and  permission  of  the  court,  issued 
certificates  to  persons  in  Montreal  for  funds  to  extend  the  road. 
,  During  1878,  112  miles  were  thus  constructed  at  a  cost  of  $14,000 
per  mile. 

At  the  same  time  this  group  of  men  was  buying  many  of  the 
St.  Paul  and  Pacific  stocks  and  bonds  not  yet  in  their  possession, 
and  was  securing  as  complete  control  of  the  road  as  possible.  * 
They  organized,  May  23,  1879,  a  new  company,  the  St.  Paul, 
Minneapolis  and  Manitoba  Railway  Company,  which  b}^  buying  up 
the  various  divisions  of  the  St.  Paul  and  Pacific  as  the  mortgages 
on  them  were  foreclosed,  on  June  7  took  over  the  whole  of  the 
former  road  and  its  recent  extensions.  Mr.  Hill  was  elected  a 
director  and  general  manager  of  the  new  company.  ^  Fifteen 
millions  of  capital  stock  were  issued,  and  eight  millions  of  7  per 
cent  first  mortgage  gold  bonds  which  could  be  retired  by  lot  at  105 
with  the  proceeds  from  land  sales.  The  proceeds  formed,  in  fact, 
a  special  sinking  fund  for  the  redemption  of  the  bonds  which  made 
them  doubly  safe.^  These  gilt-edged  securities,  nearly  always 
quoted  several  points  above   105,  were  used  to  pay,  according  to 


1.  In  this  connection  we  must  recall  the  condition  of  the  road,  supra, 
p.  24,  and  not  only  that  earrings  were  a  negligible  quantity,  but  that 
fresh  sums  had  to  be  borrowed  from  time  to  time  on  bond  issues,  to  make 
the  extensions  necessary  to  save  the  land  grant. 

2.  Vide  Columns  III  and  IV  in  table,  p.  26.  Mr.  John  Knuppe,  of  St. 
Paul,  who  knew  personally  the  situation,  says  that  the  bondholders  fixed 
their  own  price,  considerably  above  the  market  price,  and  thought  by  many 
entirely  too  high. 

3.  This  was  the  part  of  the  road  which  passed  into  receiver's  hands  in 
1873.      Vide  supra,  p.  24. 

4.  The  purchase  of  the  Litchfield  interests  is  mentioned  in  the  Railroad 
Gazette,  Feb.  21,  1879. 

5.  The  Chronicle,  May  31,  1879.  He  was  made  president  of  the  road 
in  1882,  and  served  in  that  capacity  till  the  organization  of  the  Great  North- 


em. 


6.  Poor's  Manual,  1880,  p.  827. 


*^  Of  THC  ^ 


UNIVERSITY 


28       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

agreement,^  the  remainder  of  the  sums  due  the  former  holders  of 
the  St.  Paul  and  Pacific  bonds  from  whom  they  had  been  purchased 
by  Mr.  Hill  and  his  associates.  The  new  seven  per  cents  were  also 
exchanged  for  the  certificates  issued  by  the  receiver  of  the  St. 
Paul  and  Pacific  in  1878.^  In  this  way  $6,780,000  of  the  first 
mortgage  bonds  were  issued;^  and  all  debts  of  the  St.  Paul  and 
Pacific  taken  over  by  the  new  company  were  thereby  extinguished. 
For  further  extension  of  the  road  funds  were  easily  obtained  by 
the  sale  of  second  mortgage  six  per  cents  of  an  authorized  issue 
of  S8, 000,000.^  These  were  always  quoted  over  90,  and  after 
August,  1880,  over  par.  As  to  the  fifteen  millions  of  capital  stock, 
about  $11,200,000  of  it  was  divided  equally  among  the  four  men 
who  bought  the  road  and  organized  the  new  company— Hill, 
Kittson,  Smith  and  Stephen — so  that  each  received  $2,800,000  of 
stock.  *  The  rest  was  kept  in  the  treasury  to  be  sold  later  for 
funds  to  extend  the. road. 

This  identifies!  Mr.  Hill's  fortune  with  the  fortune  of  the  road. 

1  I'-  — 

A  study  of  the  latter  is  a  study  of  the  former.  I  Not  only  has  his 
!  wealth  consisted  largely  of  these  securities,  but  it  is  a  matter  of 
common  report  that  the  management  of  the  Manitoba  and  of  its 
successor,  the  Great  Northern,  has  rested  almost  exclusively  with 
Mr.  Hill,  that  Manitoba  or  Great  Northern  policy  is  Hill  policy. 
Most  of  the  other  large  stockholders  have  lived  out  of  the  country 
in  England  or  Canada,/  or  in  New  England  and  New  York.  They 
V   .Jiave  drawn  their  dividends  and  left  the  management  to  the  presi- 

''  dent;^  who  has  never  accepted  a  salary  for  the  work.  This  state 
of  facts  makes  the  study  of  his  fortune  easier:  we  may  take  the 
fortunes  of  the  road,  knowing  that  they  are  Mr.  Hill's,  and  may 
examine  the  causes  of  its  prosperity  with  the  assurance  that  in 

i  as  far  as  these  causes  lie  in  the  general  policy  of  the  road  they  are 
traceable  to  Mr.  Hill.  This  is  the  reason  for  turning  attention  to 
the  management  of  the  Manitoba  and  its  success, — the  close  identi- 

'     fication  of  these  with  Mr.  Hill. 


1.  Vide  supra,  pp.  26-27. 

2.  The  Chronicle,  Aug.  30,  1879. 

3.  The  Chronicle,  Nov.  15,  1879. 

4.  This  is  the  statement  of  Mr.  Hill.  The  allegation  of  Mr.  Farley  in 
Farley  v.  Kittson  (vide  p.  25,  note  i)  is  that  the  joint  share  of  Messrs. 
Kittson  and  Hill  was  57,646  shares  of  stock,  which  practically  corresponds 
with  the  above.      120  U.  S.  303  at  30S. 

5.  Lord  Strathcona  and  Lord  Mount-Stephen. 

6.  Mr.  James,  of  New  York,  for  instance,  speaks  strongly  of  the  con- 
fidence with  which  Mr.  Hill  is  given  a  free  hand. 


IN  THIS  COUNTRY.— J.  J.  HILL. 


29 


§  4.  The  St.  Paul,  Minneapolis  and  Manitoba  was  prosperous 
from  the  start.  Mr.  Hill  was  not  mistaken  in  his  Judgment  of  its 
prospects.  The  first  extension,  built,  as  we  have  seen,^  while  the 
road  was  still  the  St.  Paul  and  Pacific,  ran  north  from  Breckenridge 
to  the  Canadian  border.  The  75  miles  of  line  in  Manitoba  needed 
to  complete  rail  connection  with  Winnipeg,  also  were  finished  in 
1878  by  the  Canadian  Pacific.  From  its  completion  until  1883 
enormous  quantities  of  freight  passed  over  this  through  route  to 
Manitoba  because  of  the  great  "boom"  then  in  progress  in  that 
province,  and  because  of  the  demand  of  the  Canadian  Pacific  for 
construction  materials  to  extend  its  line  west.  In  the  wheat 
districts  of  Minnesota  and  Dakota  many  branches  were  built  as 
feeders,  and  to  encourage  settlement.  The  following  table  shows 
the  growth:^ 

THE  ST.  PAUL,  MINNEAPOLIS  AND  MANITOBA  RAILWAY. 


Mileage. 


Net  earnings . 
Dividends... . 
Capital  stock. 
Bonded  debt. 


1878 


407 


$473,977a 


1880 


656 


$1,584,817 


15,000,000 
16,-324,900 


1881 


702 


$1,906,756 


15,000,000 
18,107,700 


1882 


926 

$3,308,917 

6H% 
15,000,000 
18,646,000 


1883 


1,203 

$4,689,779 

9H% 
20,000,000 
20,791,720 


1884 


1,378 

$4,449,251 

8% 
20,000,000 
31,368,000 


a  Earnings  for  441  miles  of  road. 

In  the  period  1880  to  1883  the  mileage  was  nearly  doubled, 
the  road  was  practically  rebuilt,  iron  rails  were  replaced  with 
steel,  equipment  was  quadrupled  and  extensive  improvemxcnts 
made.  At  the  same  time  there  was  but  $4,000,000  added  to  the 
bonded  debt  and  $5,000,000  to  the  capital  stock.  This  was  the 
result  of  the  lavish  use  of  earnings  for  improvements,^  which  is 
seen  in  the  fact  that  operating  expenses  increased  enormously, 
approximately  equaling  net  earnings  in  each  of  these  years.  Not 
ojily  this,  but  during  the  same  three  years  a  profit  and  loss  account 
of  +  $5,671,976  accumulated. 

Naturally  the  stock  rose  greatly  in  value.  In  October,  1880, 
it  was  quoted  at  67;  in  August,  1882,  at  146.*    The  road  was  worth 

1.   Supra,  p.  27. 

.2.  From  Poor's  Manual,  1879,  pp.  791-4,  and  1885,  p.  726. 

>-3.  The  Chronicle,  Sept.  2,  1882,  quoting  from  the  Manitoba  Annual 
Report  for  the  same  year.  The  Chronicle,  Aug.  11,  1883,  published  a  state- 
ment of  Pres.  Hill's,  that  210  miles  were  built  and  $1,700,000  spent  on 
equipment  without  bond  issue. 

4.  These  quotations  are  from  the  Chronicle.  Oct.  1880  is  the  first  time 
the  stock  is  there  quoted. 


30       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

much  more  than  its  capitaHzation,  stocks  and  bonds;  and  dividends 
had  not  been  paid  during  the  first  two  years  of  its  existence.  The 
$5,000,000  new  stock  issued  in  1882,  was  offered  at  par  to  stock- 
holders of  record  to  one-third  the  amount  of  their  holdings.  * 
It  was  not  a  bonus.  Under  these  circumstances  the  directors 
conferred  upon  the  stockholders  of  record  of  May  i,  1883,  the 
privilege  of  acquiring  at  10  per  cent  of  their  par  value,  consolidated 
mortgage  6  per  cent  fifty  year  gold  bonds  to  the  amount  of  fifty 
per  cent  of  their  stock  holdings.  ^  This  issue  of  bonds,  in  contrast 
to  the  stock  mentioned  above,  subscribed  for  at  par,  was  a  scrip 
dividend  of  45  per  cent.  "Manitoba"  rose  from  145  to  167  as  the 
news  of  this  dividend  got  abroad,  falling  to  123  ex-privilege  and 
then  recovering  slightly.  The  scrip  dividend  of  45  per  cent  caused 
the  stock  to  fall  but  22  points.  It  remained  above  par  because 
property  was  behind  the  issue. 

But  how  did  these  events  affect  Mr.  Hill's  fortune?  The 
$250,000^  originally  contributed  by  him  to  the  pool  for  buying  the 
bonds  of  the  St.  Paul  and  Pacific,  reappeared  with  the  organization 
of  the  Manitoba,  in  1879,  as  $2,800,000  stock*  in  that  railroad, 
quoted  considerably  under  par.  Let  us  suppose  that  during  the 
years  of  prosperity  which  followed,  he  merely  retained  his  stock 
and  subscribed  for  the  new  stock  and  bonds  to  which  28/150 
ownership  entitled  him.  This  certainly  ought  not  to  be  an  over- 
estimate of  the  increase  in  his  wealth.  Of  the  $5,000,000  stock 
issued  he  could  purchase  $933,333,  increasing  his  holdings  to 
$3<733^333-  Twenty-eight  one  hundred  and  fiftieths  (28/150)  of 
the  $10,000,000  bonds  gives  $1,866,666  as  Mr.  Hill's  share. 
Remembering  that  the  stock  v/as  quoted  near  125  and  the  bonds 
over  par, he  would  hold  in  June,  1883, in  market  value  of  these  two 
securities,  over  $6,500,000.  At  the  same  time  it  would  have  been 
necessary  to  borrow  $933,333  to  subscribe  for  the  new  issue  of 
stock,*  and  $186,666  to  pay  the  10  per  cent  on  the  bonds.  On 
the  other  hand,  dividends  of  63^  per  cent  on  $2,800,000*  and 
9^2  per  cent  on  $3,733,333''  would  have  been  paid.  They  would 
bring  in  $536,666,  but  still  leave  $583,333  of  debt.     By  July  18, 


1.  The  Chronicle,  June  10,  1882. 

2.  This  action  was  taken  April  12,  1883.     The  Chronicle,  April  14,  1883. 

3.  Supra,  p.  25. 

4.  Supra,  p.  28. 

5.  It  was  issued  at  par. 

6.  $182,000. 

7.  $354,666. 


IN  THIS  COUNTRY.— J.  J.  HILL.  ai 

1883,  Mr.  Hill's  share  would  thus  amount  to  $5,600,000  par  value 
of  6  per  cent  securities,  on  which  there  would  be  a  debt  of  $583,333. 

§  5.  Mr.  Hill's  fortune  thus  became  identified  with  the  rail- 
road at  its  purchase  and  reorganization.  The  next  question  is, 
-^^bat  caused  the  rapid  rise  in  the  value  of  the  company's  stock  and 
its  great  prosperityT'  As  a  preliminary  condition  or  cause,  we  must 
recognize  that  the  market  for  securities,  especially  for  railroads, 
was  at  the  time  of  the  organization  of  the  road  in  1879,  favorable, 
and  was  improving.  Capital  for  the  extension  of  the  line  was 
obtained  easily  and  at  comparatively  low  rates.  ^  Given  this 
satisfactory  money  market,  we  may  turn  to  the  all-important 
matter  of  trafiEic.  It  is  well  known  that  because  fixed  charges 
form  so  considerable  a  part  of  a  railroad's  expenses  the  sine  qua 
non  of  large  earnings  is  heavy  traffic,  even  at  low  rates.  A  subse- 
quent table  gives  both  the  average  rate  per  ton-mile  and  the 
density  of  traffic.^  The  latter  item  we  notice  is  large,  especially 
in  1883,  and  that,  too,  with  a  railroad  whose  mileage  was  being 
rapidly  increased  each  year.  It  had  the  tonnage  and  was  prosper- 
ous. The  reasons  given  in  the  Chronicle^  are:  'Tirst,  the  revival 
of  business  in  the  United  States  following  1878  and  the  resulting 
activity  and  expansion;  second,  the  road  was  extended  to  the 
(Canadian)  frontier  and  was  in  a  position  to  command  traffic;* 
third,  the  territory  through  which  it  passed  developed  great 
fruitfulness,    and    on    account    of    desirability    attracted    settlers 


1.  Vide  supra,  p.  28. 

2.  Page  41. 

3.  Sept.  22,  1883. 

4.  One  point  in  this  regard: — the  Manitoba  had  direct  connections  with 
the  Canadian  Pacific,  and  so  the  following  state  of  affairs  would  be  favorable 
to  it.  The  Canadian  road  secured  several  privileges  from  the  government, 
and  one  of  these  worked  to  protect  its  territory  in  the  West  from  invasion 

by  U.  S.  roads.     " under  Dominion  law,  in  order  to  prevent  American 

lines  from  being  extended  into  the  province  (Manitoba),  no  railroad  com- 
peting with  the  Canadian  Pacific  could  be  built  within  15  miles  of  the  inter- 
national boundary."  Villard,  Memoirs,  1904,  vol.  ii,  p.  307.  Mr.  Villard 
is  writing  of  the  year  1883,  and  goes  on  to  tell  how  in  that  year  the  Northern 
Pacific,  of  which  he  was  president,  planned  to  get  to  Winnipeg  by  carrying 
passengers  and  freight  in  wagons  across  the  forbidden  fifteen  miles  and  then 
building  a  railroad  for  the  rest  of  the  distance.  But  the  scheme  proved 
impracticable,  and  the  construction  which  had  taken  place  was  sold  out  to 
the  Manitoba. 


32       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

beyond  any  other  section  of  the  country;^  fourth,  the  unparalleled 
movement  of  immigrants  to  Manitoba  accompanied  by  the  building 
of  the  Canadian  Pacific  and  the  great  'boom'  to  which  this  gave 
rise."^ 

The  return  of  good  times  to  the  countr\'  and  the  movement 
west,  together  with  the  building  of  the  Canadian  Pacific  and  the 
great  jjrowth  in  the  population__.and  trade  of  Manitoba,  though 
perhaps  exceeding  in  degree  his  expectations,  were  no  doubt 
foreseen  by  Mr.  Hill,  and  were  great  factors  in  his  determination 
to  buy  the  St.  Paul  and  Pacific.  Such  a  prosperous  beginning 
was  of  immense  importance  to  the  road. 

"The  difference  between  success  and  failure  in  a  border  railroad 
may  well  be  the  length  of  time  occupied  in  bringing  the  country 
on  its  line  under  cultivation.  Certainly  what  seemed  the  too 
numerous  roads  built  in  Western  Minnesota  and  Eastern  Dakota 
last  year  have  received  a  favorable  start." ^ 

The  "start,"  however,  was  not  the  result  of  accident  only, 
but  of  the  imaginative  power  to  see  the  future  and  courage  in  one's 
convictions.     It  required  action  to  be  prepared  for  the  opportu- 
nities, to  make  the  most  of  them  and  double  or  treble  their  value. 
"Or  say,  the  foresight  that  awaits 
Is  the  same  Genius  that  creates.  ""* 

Mr.  Hill  was  not  lacking  in  this  quality  of  enterprise.  He 
knew  the  country  and  put  the  line  through  the  most  fertile  part. 
Two  sections  of  the  road  were  run  through  the  rich  valley  of  the 
Red  River,  paralleling  the  river  on  either  side  for  most  of  its 
length.  ^  The  productive  mileage  was  ver}'-  large.  Mr.  Hill  was 
able  to  place  these  lines  alongside  the  river  without  fear  of  water 
competition,  since  his  experience  with  steamboats  there  had  shown 
him  of  what  the}'  were  capable.  Results  have  proved  this  judg- 
ment correct.  Again,  he  interested  Canadians  in  the  road  and 
himself  entered  the  syndicate  for  the  construction  of  the  Canadian 

1.  'Dull  times  (as  those  following  '73)  when  profits  in  business  are 
small  and  men  are  failing,  serve  as  an  impetus  to  take  up  land  as  a  surer 
means  of  livelihood.  The  panic  stimulated  the  movement  west.' — Mr. 
Hill. 

2.  In  1883,  48%  of  the  traffic  came  from  Canadian  sources. 

3.  R.  R.  Gazette,  Aug.  13,  1880.  It  goes  on  to  explain  the  situation: 
"Without  being  in  any  way  extraordinary,  the  crop  (in  that  region)  is 
satisfactory,  and  even  at  low  prices  is  likely  to  encourage  further  immigra- 
tion and  production."     This  is  one  cause  of  the  "favorable  start." 

4.  Emerson,  The  Conduct  of  Life. 

5.  The  Northern  Pacific  crossed  it  at  right  angles. 


IN  THIS  COUNTRY.— J.  J.  HILL.  33 

Pacific,  thus  insuring  the  harmonious  operation  of  the  two  lines. 
This  would  be  of  great  importance  to  the  Manitoba  because  of  the 
large  part  of  its  traffic  coming  from  Canadian  sources.  ^  This 
location  of  lines,  gaining  the  good  will  of  influential  Canadians  and 
fixing  rates  so  that  the  grain  could  move,^  seem  almost  faultless 
preparation  for  the  control  of  western  traffic  and  the  increase  of  , 
settlement ;  and  of  the  opportunity  which  others  might  easily  have 
let  pass  by  without  much  improving  it,  he  made  great  use.  The 
railroad  was  there  and  in  the  right  place;  traffic  flowed  naturally 
over  it;^- and  new  farms  sprang  up  along  its  lines.  The  man  behind 
the  "boom"  was  a  great  element  in  its  success. 

§6.  Returning  to  the  story  of  the  road,— Mr.  Hill's  road, — 
in  1884  came  a  period  of  depression;  business  was  less  active;  the 
completion  of  the  Canadian  Pacific  west  from  Lake  Superior  in 
1883  enabled  it  to  carry  its  own  construction  material;  and  as  a 
result  the  tonnage  of  the  Manitoba  fell  off  temporarily.^  But  the 
loss  was  not  serious;  and  a  6^  per  cent  dividend  was  paid  in  1885.  * 
The  prosperity  of  the  road  was  based  on  more  lasting  causes, — 
the  crops  had  to  be  moved;  and  they  furnished  a  constant  source 
of  revenue. 

During  this  depression  Manitoba  stock  fell  less  than  some  of 
the  old  established  securities. 


1.  Vide  supra,  p.  32,  note  2. 

2.  For  a  discussion  of  Mr.  Hill's  policy  with  regard  to  rates,  vide  p.  44. 

3.  The  Chronicle,  Sept.  22,  18S3. 

4.  Poor's  Manual,  1886,  p.  60. 


34 


ECONOMIC  CAUSES  OF  LARGE  FORTUNES 


HIGH  AND  LOW  POINTS  ON  THE  NEW  YORK  STOCK  EXCHANGE 
FOR  THE  MONTH  GIVEN,  i 


18S3 

1884 

1885 

1886 

June 

Dec. 

June 

Dec. 

June 

Dec. 

June 

Dec. 

St.  Paul,  Minneapolis  &  f 
Manitoba \ 

Northern    Pacific,    Pre-  f 
ferred ■{ 

New  York  Central \ 

115H 
to 

124M 

87 
to 
90% 

118H 
to 

125 

94 
to 

lOlM 

49  M 
to 

64K 

iii^ 
to 

118% 

78H 

to 

92 

37M 
to 

50K 

94M 

to 

108% 

77H 
to 

86 

38M 
to 
42M 

83H 
to 

92% 

83M 
to 

lOI 

37 
to 

40M 

SiH 

to 

88^ 

1065^ 

to 
III 

57 
to 

65  M 

lOlJ^ 

to 
io6j^ 

"5 

to 

117 

55J^ 
to 

102 

to 

108 

113 
to 
118K 

58 
to 

io8i^ 

to 
117^ 

According  to  the  above  table,  New  York  Central  and  Manitoba 
stock  fell  about  the  same  number  of  points,  though  the  former  was 
some  six  months  behind  the  latter  in  both  fall  and  recovery. 
Manitoba  paid  6}^  per  cent  dividends  in  1885,  and  has  yielded 
6  per  cent  every  year  since  then.  Mr.  Hill's  wisdom  in  securing  for 
the  road  a  productive  mileage  is  shown  in  its  ability  to  weather 
this  storm,  when  compared  with  the  Northern  Pacific,  whose  line 
was  long  but  unproductive. 

This,  however,  was  an  unfavorable  period  for  extension;  and 
the  mileage  in  the  two  years,  1884  to  1886,  increased  from  1,378 
to  only  1,470.^  But  conditions  in  the  latter  year  were  ripe  for 
the  construction  of  the  road  westward.  '  Thre^  new  trunk  lines 
•were  completed  during  the  year  from  Chicago  to  St.  Paul,  producing 
competition  favorable  to  the  Northwest.  ^Settlers  were  taking 
up  land  beyond  the  existing  road  in  considerable  quantities,  and 
required  adequate  railway  facilities. 'f  Building  on  the  main  line 
west  through  Dakota  commenced  in  1886;  and  at  the  same  time 

1.  The  Chronicle,  yearly  quotations. 

2.  Poor's  Manual,  1887,  p.  836. 

3.  The  Annual  Report  of  the  Manitoba  for  1S86,  in  the  R.  R.  Gazette, 
Oct.  I,  1886. 


IN  THIS  COUNTRY.— J.  J.  HILL.  35 

rates  on  grain,  livestock,  lumber  and  coal  were  reduced   lo  per 
cent  to  15  per  cent.  ^ 

Mr.  Hill,  by  establishing  in  1887  and  1888  an  eastern  terminus 
at  Superior  as  well  as  in  St.  Paul,  by  buying  or  building  large 
elevators  and  docks  in  the  former  city,  by  putting  a  fleet  of  six 
steel  freight  steamers  on  the  Great  Lakes,  ^  and  constructing  an 
elevator  at  Buffalo,  not  only  made  use  of  that  excellent  water 
route  for  carrying  grain  east,  but  improved  the  strategic  position 
of  his  road.  The  Manitoba  became  independent  of  the  Chicago 
roads,  and  could  fix  through  rates  to  Buffalo  on  Northwestern 
products  which  the  others  would  have  to  accept  or  let  the  traffic 
go  by  boat.  There  was  no  way  to  corner  or  drive  to  the  wall  a 
road  with  this  outlet;  and  the  power  to  name  the  rate  enabled 
the  Manitoba  to  give  the  farmers  a  low  enough  one  to  insure  the 
development  of  the  country  and  its  own  prosperity.  ^ 

Other  important  changes  were  taking  place  at  the  same  time. 

/  The  mileage  reached  2,931  by  July,  1889, /thus  doubling  in  three 
years.  ^  The  western  extension  had  been  built  to  Helena  and 
Butte,  Montana,^  and,  with  its  large  local  traffic  in  ore  and  coal 
especially,  as  well  as  with  its  quota  of  through  freight,  *  was  proving 
to  be  of  value.  ^  Moreover,  the  company  acquired  coal  mines  in 
Montana  which  supplied  it  with  a  large  part  of  its  fuel.  ^  The  capital 
stock  of  the  Manitoba  was  limited  by  charter  to  $20,000,000;  and 
most  of  the  funds  required  for  new  construction  had  been  obtained 
by  the  issue  of  bonds,  a  large  amount  of  which  were  now  outstand- 
ing. Many  of  the  extensions  had  been  built  by  separate,  pro- 
prietary companies,  ail  of  whose  stock  was  owned  by  the  Manitoba.  ^ 

^JBut  it  became  apparent  that  the  road  was  to  develop  into  a  great 
trans-continental  railway  system  with  extensive  branches  and 
numerous  subsidiary  companies;  and  an  organization  suited  to  the 
magnitude  of  the  business  with  a  much  larger  authorized  capital 
stock  was  required.     To  secure  this  the  Great  Northern  Railway 

1.  Hid.  The  farmers  farther  west  would  need  a  lower  rate  to  permit 
their  grain  to  move. 

2.  The  Annual  Report  for  1887,  in  the  Gazette,  Oct.  21,  1887;  also  a 
circular  issued  by  Pres.  Hill  given  in  the  Gazette,  March  9,  1888.  This  work 
was  done  through  proprietary  companies:  the  Eastern  IMinnesota,  the  Lake 
Superior  and  Southwestern  Company,  and  the  Northern  Steamship  Company. 

3.  Poor's  Manual,  1890,  p.  569. 

4.  Part  of  the  line  was  owned  by  the  proprietary  company,  the  Montana 
Central. 

5.  Chiefly  grain,  livestock  and  coal. 

6.  Annual  Report  for  1889,  in  the  Chronicle,  Nov.  16,   1889. 


/ 


36       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

Company  was  formed  in  1889;'  and  the  Manitoba  leased  its  lines 
for  999  years  and  handed  over  the  stock  and  bonds  of  its  proprietary 
railroads  to  that  company.  In  return  it  received  a  guarantee  of 
interest  on  its  bonds  and  six  per  cent  on_it_s  stoc^  The  Great 
Northern  issued  $20,000,000  preferred  stock  only.  The  entire 
issue  was  offered  pro  rata  to  the  holders  of  Manitoba  at  50.  The 
other  $10,000,000  of  the  par  value  was  met  by  the  transfer  to  the 
Great  Northern  of  $22,000,000  of  securities-  subject  to  a  lien  of 
$8,000,000  in  bonds.  It  now  assumed  general  control,  and,  by 
its  position  as  operating  company  for  the  entire  system,  the  Mani- 
toba and  its  proprietary  companies,  assured  unity  of  action  and 
ease  of  further  extension.  ^ 

The  capital  stock  of  the  Great  Northern  has  been  increased 
from  time  to  time,  chiefly  since  1897,  until  the  present  amount  is 
$210,000,000.  There  is  but  one  kind,  preferred,  the  right  to 
issue  common  stock  having  been  surrendered  in  1898.*  The 
same  year  $25,000,000  of  Great  Northern  stock  was  issued  in  ex- 
exchange  at  the  rate  of  five  shares  for  four,  for  the  $20,000,000* 
of  the  Manitoba  stock;  most  of  the  latter  was  turned  in;  and  the 
two  companies  were  thus  definitely  united.  In  most  of  the  other 
instances  of  increase  in  capitalization  of  the  Great  ^Northern,  the 
new  issue  has  been  offered  for  cash  at  par  to  the  existing  stock- 
holders^ pro  rata  of  the  amount  of  their  holdings. ''  Where  bonuses 
have  been  paid  they  have  represented  new  property.     The  great 


1.  It  was  organized  under  the  old  charter  of  the  Minneapolis  and  St. 
Cloud  Railway,  which  allowed  a  change  of  name. 

2.  Of  the  proprietary  companies  as  above  mentioned. 

3.  The  change  also  permitted  an  increase  of  stock,  for  the  authorized 
capital  of  the  Great  Northern  at  the  time  was  $40,000,000.  Hence  bonds 
would  not,  as  with  the  Manitoba,  have  to  be  relied  upon  entirely  for  funds 
for  extension.  Changes  in  corporate  form  have  often  been  the  source  of 
fortunes  for  the  promoters;  but  nothing  of  the  sort  is  apparent  here. 

4.  Poor's  Manual,  1899. 

5.  Annual  Report,  Great  Northern,  1S99. 

6.  Except  Sr, 000, 000  which  was  opened  to  subscriptions  of  employees 
of  the  road  under  certain  conditions.  Of  the  issue  of  1898,  $10,000,000 
could  be  paid  in  that  amount  of  certificates  issued  previously  to  stock- 
holders and  representing  a  branch  road  which  the  Great  Northern  had  built. 

7.  Annual  Reports,  1893,  1899,  1900  and  1901.  There  was  an  increase 
from  $125,000,000  to  $150,000,000  for  stockholders  of  record,  Nov.  8,  1905, 
and  a_]_further  issue  of  $60,000,000  in  January,  1907. 


IN  THIS  COUNTRY.— J.  J.  HILL.  37 

majority  of  the  stock  thus  represents  cash  paid  in;'  if  not,  property 
at  cost  value  or  less;  and  it  has  always  been  divided  proportionately 
among  existing  holders.  There  is  an  absence  of  two  kinds  of  stock, 
or  extensive  watering  of  the  capital.  Nor  is  there  any  appearance 
of  there  being  any  specially  favored  companies  working  in  connec- 
tion with  the  Great  Northern  such  as  have  accounted  in  some 
instances  for  the  accumulation  of  great  wealth.  The  stockholders 
get  the  full  benefit  of  the  great  earning  capacity  of  the  road.  The 
subsidiary  companies  all  pay  their  surplus  into  a  common  treasury, 
whence  they  go  as  dividends  on  "Great  Northern."^ 

That  stock  paid  33^  per  cent  in  1891;  5  per  cent,  1892-1897; 
6M  per  cent  in  1898;  and  7  per  cent  since  then.  It  has  made  Mr. 
Hill  rich.  As  in  the  case  of  the  Manitoba,  he  has  directed  the 
policy  of  the  road.  But  what  has  this  direction  contributed  to  its 
prosperity?  In  investigating  the  matter,  we  shall  first  complete 
briefly,  for  much  of  it  is  well  known,  the  traffic  story  of  the  road, 
which  involves  some  of  the  most  interesting  and  important  chapters 
in  the  history  of  the  Northwest.  Then,  with  these  concrete 
illustrations  before  us,  we  can  discuss  in  a  general  way  the  salient 
features  of  Mr.  Hill's  railroad  management  and  their  significance. 

§  7.  The  Great  Northern  was  the  first  trans-continental  line 
to  be  built  without  a  land  grant  or  any  bonus.  ^  Others  had 
regarded  the  assistance  of  the  Government  as  necessary  to  success 
in  like  undertakings;   and  it    is  known  what  a   generous    subsidy 

1.  In  the  following  cases  only  have  stock  or  bond  bonuses  been  dis- 
covered {sed  vide  p.  40) : 

1879     $11,200,000  original  stock  of  the  Manitoba  distributed,  less 

$1,000,000  in  the  pool $10,200,000 

1883     The  $10,000,000  bond  issue,  less  10%  paid 9,ooo,t)oo 

1889     $20,000,000  original  Great  Northern  stock  less  50% 

cash  payment 10,000,000 

1898     Certificates  used  for  subscription  to  stock 10,000,000 

1898     $25,000,000   Great    Northern   stock,   offered  in   ex- 
change for  $20,000,000  Manitoba 5,000,000 

1908     Total $44,200,000 

The  receipts  from  the  stock  sales  have  been  used  to  buy  or  build  exten- 
sions or  retire  bonds.  Thus,  the  policy  of  using  stocks  largely,  as  well  as 
bonds,  to  secure  funds,  has  been  followed.  Increased  earning  power  is 
reflected  more  in  the  high  price  of  these  securities  than  in  the  issue  of  scrip 
dividends. 

2.  W.  B.  Dean,  St.  Paul,  a  director  of  the  Great  Northern. 

3.  The  land  given  the  St.  Paul  and  Pacific  by  the  State  of  Minnesota 
served  a  purely  local  purpose.  The  Great  Northern  even  paid  for  its  right 
of  way  through  public  lands. 


38       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

many  of  them  received.  But  Mr.  Hill  was  original,  and  realized 
thoroughly  that  a  large  tonnage  is  the  essential  matter  for  a  rail- 
road. With  this,  any  line  can  stand  on  its  own  feet.  Sojduring 
the  years  1890  to  1893  the  Great  Northern  was  built  across  to  the 
Pacific^  with  the  lumber  traffic  as  the  justification  of  the  move.  ^ 
Hitherto  the  lumber  supply  of  the  North  Central  and  North- 
western states  had  come  chiefly  from  the  forests  of  Michigan, 
Wisconsin  and  Minnesota.  But  these  were  being  rapidly  ex- 
exhausted,  while  population  and  demand  for  lumber  were  increas- 
ing. The  source  of  supply  for  the  future  lay  in  the  extensive 
forests,  as  yet  intact,  of  the  State  of  Washington,  "the  largest 
bodies  of  pine  and  other  valuable  timber  left  standing  in  the 
country."^  An  enormous  traffic  was  here  offered, — to  carry  these 
forests  to  the  people  of  the  Mississippi  Valley  for  the  construction 
of  houses  and  barnsTji  It  is  likely  that  the  existence  of  this  possi- 
bility was  realized  by  others;  but  ability  of  no  inconsiderable 
order  was  required  to  meet  the  difficulties  present.  To  carry  a 
commodity  like  lumber,  of  such  low  value  in  proportion  to  its 
weight,  2,000  miles  or  more,  would  necessitate  a  rate  per  ton-mile 
that  would  be  low  for  any  part  of  the  country,  and  out  of  the 
question  in  the  West,  where  fuel  was  scarce  and  haulage  across 
the  mountains  with  their  steep  grades  was  expensive.  Mr.  Hill 
Ik  made  the  necessary  rate.  It  had  been  90  cents  per  cwt. ;  but  this 
was  prohibitive.  He  called  the  lumbermen  of  the  Pacific  coast 
together,  and  asked  what  rate  they  would  require  to  put  their 
product  into  the  markets  of  the  East  in  competition  with  that  of 
Michigan  and  Minnesota.  They  replied,  65  cents_per  cwt.,  which 
he  said  was  still  too  high,  and/made  the  rate  40  cents.^  i  What 
made  such  a  rate  possible  as  a  paying  proposition?;  ^  It  was  the 
efficiency  of  the  Great  Northern  as  a  common  carrier.  S8oo,ooo 
had  been  spent  in  a  most  thorough  survey  of  the  RocTcy  Mountains; 
and  the  best  possible  location  of  the  line,  with  a  maximum  gradient 
of  but  I  per  cent,  was  thus  secured,^  so  that  an  engine  could  pull 
a  much  heavier  load  than  on  other  lines.  Then,  too,  this  was 
back-haul  traffic;  and  it  cost  but  little  more  to  carry  timber  in  the 
cars  than  to  haul  them  empty.     In  this  way  Mr.   Hill  did  what 


1.  Annual  Reports  of  the  Great  Northern,   1890-1893. 

2.  Mr.  Hill's  testimony  in  the  "Merger  case," — U.  S.  v.  Northern 
Securities  Co.,  Defendants'  Testimony,  Transcript,  vol.  3,  pp.  663  ff.  This 
is  an  authority  for  much  that  follows  in  the  same  connection. 

3.  Annual  Report,  1893. 


IN  THIS  COUNTRY.— J.  J.  HILL.  :i9 

had  not  been  done  before;*  the  Northern  Pacific,  completed  to 
the  coast  in  1883,  does  not  appear  to  have  been  able  to  handle  the 
lumber;  new  traffic  was  created  by  the  Great  Northern. 

During  the  crisis  of  1893,  when  many  roads,  including  the 
Northern  Pacific,  passed  into  receiver's  hands,  the  Great  Northern 
paid  its  regular  5  per  cent  dividends,  ^  thus  displaying  a  remarkably 
firmly  founded  earning  capacity  for  a  new  road  which  had  just 
completed  a  long  extension.  The  Annual  Reports  indicate  that 
recovery  from  the  shock  took  place  most  rapidly  in  the  West,  and 
that  that  part  of  the  line  contributed  more  than  its  share  to  sustain 
earnings,  an  immediate  vindication  of  Mr.  Hill's  policy  in  building 
to  the  Pacific.  ^ 

New  lines  have  been  constructed  till  the  mileage  in  1908  was 
6,716.^  Most  of  these  have  been  branches  in  the  farming  districts 
of  Minnesota  and  Dakota,  or  in  the  mining  and  timber  regions  of 
the  far  West.  A  short-line  across  Northern  Minnesota  from 
Dakota  to  Superior,  laid  in  1898,  permitted  a  reduction  in  rates 
on  wheat  from  the  former  district  moving  east.* 

Recently  the  Oriental  trade  has  assumed  a  position  of  import- 
ance; and  we  give  the  main  facts  of  its  relation  to  the  Great  Northern 
in  the  following  quotation  from  the  Annual  Report  for  1900: 

"The  growth  of  lumber  and  timber  business  from  west  of  the 
Rocky  Mountains  begins  to  call  for  more  cars  than  are  loaded  west- 
bound. (The  company  could  not  afford  to  haul  empty  cars  west 
for  a  traffic  paying  such  low  rates  as  lumber,  and  so  was  obliged 
to  find  means  to  increase  west-bound  freight.  The  export  traffic 
served  this  purpose  and  was  to  be  encouraged.)  Oriental  trade 
has  already  reached  a  point  where  the  traffic  is  practically  limited 
to  the  ships  which  can  be  secured  to  carry  the  commodities  seeking 

1.  A  forecast  of  the  situation  is  given  in  the  Annual  Report  for  1890. 
"When  this  extension  (to  the  coast)  has  been  completed,  your  Company  will 
have  a  continuous  rail  line,  from  Lake  Superior,  St.  Paul  and  Minneapolis, 
to  the  Pacific  Coast,  shorter  than  any  existing  transcontinental  railway,  and 
•vvith  lower  grades  aftd  less  curvature.  '  Its  cost  and  capitalization  will  also 
be  much  less  than  those  of  any  other  "line  to  the  coast.  It  is  expected  that, 
with  the  foregoing  favorable  conditions,  the  heavier  products  of  the  Pacific 
Coast  region,  which  up  to  this  time  could  seek  markets  only  by  ocean  routes, 
can  be  moved  eastward  to  the  older  sections  of  the  country." 

2.  Poor's  Manual,  1898.  The  only  other  long  line  in  the  country  to 
maintain  dividends  1893-7  'was  the  Lake  Shore,  while  the  Great  Northern 
increased  its  dividends  to  6%  in  1897. 

3.  Annual  Report,  1908. 

4.  Annual  Report,  1899. 


40       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

an  outlet  to  China  and  Japan.  To  meet  these  conditions  and  to 
provide  ample  tonnage  for  this  trade  the  Company  has  organized 
X  the  Great  Northern  S.  S.  Company,  which  has  now  under  con- 
struction two  steamers  of  the  largest  class  with  all  the  modem 
appliances  for  safety  and  economy." 

This  trade  has  grown  considerably  and  forms  a  large  item 
in  future  prospects. 

The  joint  purchase  of  the  Burlington  in  1901  by  the  Great 
Northern  and  the  Northern  Pacific  was  important  to  Mr.  Hill's 
road  in  several  ways.  Its  chief  value,  perhaps,  was  in  furnishing 
an  outlet  to  Chicago  and  to  the  large  lum^ber-consuming  and  stock- 
feeding  districts  of  Iowa  and  the  adjoining  states,  for  the  timber, 
livestock  and  other  products  of  the  Northwest  and  the  Pacific 
Coast.  On  the  other  hand  it  tapped  regions  of  supply  of  iron  and 
steel  and  farm  implements  for  the  Orient  and  the  West,  and  of 
cotton  for  Japan.  ^  Control  of  the  Burlington  enabled  a  through 
rate  on  all  these  commodities  to  be  made  and  maintained  without 
dependence  on  another  road,  and  in  this  way  made  possible  the 
creation  of  a  large  traffic.  ^ 

The  Great  Northern  in  connection  with  buying  up  certain  ore 
roads,  also  purchased  iron  ore  mines  in  Northern  Minnesota;  but 
these,  together  with  its  coal  mines,  elevators,  etc.,  have  been  con- 
solidated separately  as  the  Lake  Superior  Company.  This  company 
did  not  report  in  connection  with  the  road  proper ;  but  its  properties 
were  held  for  the  benefit  of  Great  Northern  stockholders.  ^  More 
recently  the  company  has  issued  certificates  to  the  owners  of 
Great  Northern  shares,  on  which  the  large  profits  from  the  mines 
are  paid. 

§  8.     Mr.  Hill's  general  policy  and  its  relation  to  the  prosperity 
.   of  his  roads — the  matter  before  us  now — is  indicated  by  what  we 

1.  Annual  Report,  1901. 

2.  Mr.  Hill  described  the  importance  of  this  independence  of  action; 
"We  fotmd  that  it  was  necessary  for  us  in  order  to  be  on  a  permanent  basis, 
to  have  more  than  a  joint  rate,  to  have  more  than  a  joint  tariff,  which  might 
be  withdrawn,  at  any  time.  We  could  not  build  up  a  great  permanent 
business,  extending  across  the  continent  and  even  across  the  ocean,  on  the 
basis  that  tomorrow  the  rate  might  be  changed,  or  the  party  with  whom  we 
were  working  to  reach  the  different  points  of  production  or  consumption 
had  some  other  interest  or  some  greater  interest  elsewhere."  'A  profitable 
market  had  to  be  provided  the  cattlemen  and  lumber  men  along  the  line  of 
his  road  to  cause  them  to  continue  to  produce.'  U.  S.  v.  Northern  Securities 
Co.,  Defendants'  Testimony,  vol.   3,  pp.   670-1. 

3.  Annual  Report,  1900,  p.  29. 


IN  THIS  COUNTRY.— J.  J.  HILL. 


41 


have  already  seen.  We  shall  discuss  first,  the  construction  of 
new  lines,  then,  the  operation  of  the  road,  rates,  traffic  and  earn- 
ings, and  finally,  certain  other  matters  of  policy  which  play  their 
part  in  increasing  earnings.  In  this  connection,  tables  are  given 
of  the  mileage,  rate  per  ton-mile,  density  of  traffic,  train-load  and 

GREAT  NORTHERN. 


Rate 

Density 

Net 

Net 

Mile- 

per Ton- 

of 

Train- 

Earnings, 

Earnings 

Year 

age 

mile, 

Traffic, 

load, 

including 

per  Mile 

Cents 

Tons 

Tons 

Taxes 

1880 

656 
702 

$1,584,817 
1,906,756 

$2,416 

1881 

2.88 

132,870 

85.4 

2,785 

1882 

926 

2-51 

205,000 

II7-3 

3,308,917 

3,573 

1883 

1,203 

1-95 

283,000 

145 -I 

4,689,779 

3,995 

1884 

i>378 

1.79 

247,000 

190.9 

4,449,251 

3,229 

1885 

1,459 

1.52 

271,000 

213-5 

4,460,445 

3,057 

1886 

1,471 

1.44 

255,000 

240. 

3,663,333 

2,491 

1887 

1,739 

1.36 

259,000 

226.  7 

3,929,038 

2,259 

1888 

2,304 

1.30 

243,000 

204.5 

4,405,840 

1,912 

1889 

2,932 

1.49 

139,000 

152.7 

3,835,090 

1,308 

1890 

2,784 

1.28 

194,000 

1S5.3 

4,857,225 

1,745 

'1891 

2,796 

1.24 

220,000 

197. 

5,117,760 

1-830 

1892 

2,865 

1.23 

275,000 

202.3 

5,470,830 

1,909 

1893 

3,352 

1.23 

255,000 

235-2 

6,187,164 

1,846 

1894 

3,765 

1 .  10 

212,000 

227. 

4,856,578 

1,290 

1895 

4,374 

.984 

307,000 

252. 1 

7,343-509 

1,679 

1896 

4,374 

•976 

371,000 

256. 

9,381,856 

2,145 

1897 

4,415 

•956 

375-400 

281. 1 

8,734,189 

1,978 

1898 

4,466 

•932 

434,000 

316.29 

11,722,839 

2,625 

1899 

4,786 

.916 

451,000 

336.17 

12,853,902 

2,686 

1900 

5,076 

.899 

493,500 

356.78 

14,033,211 

2,765 

1901 

5,202 

.871 

477,000 

381.29 

12,507,269 

2,404 

1902 

5,249 

•859 

608,000 

417-59 

18,243,092 

3.475 

1903 

5,490 

■857 

657,000 

446.78 

20,708,818 

3.772 

1904 

5,623 

•893 

596,000 

447.40 

19,462,990 

3,461 

1905 

5,723 

.792 

728,700 

522.57 

22,084,161 

3,859 

The  figures  were  taken  from  Poor's  Manual.  Certain  subsidiary  lines 
were  not  included  in  1890-1894.  This  accounts  partly  for  the  figures  of 
those  years. 

The  computation  of  (a)  density  of  traffic  and  {b)  train-load  is  not  made 
in  the  Manual,  and  they  were  obtained  (a)  by  dividing  the  total  ton-mileage 
by  the  miles  of  road,  and  (b)  by  dividing  the  ton-mileage  by  the  train-mileage. 


42  ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

NORTHERN  PACIFIC. 


Rate 

Density 

Net 

Mile- 

per Ton- 

of 

Train- 

Net 

Earnings 

Year 

age 

mile, 

Traffic, 

load, 

Earnings 

per  Mile 

Cents 

Tons 

Tons 

of  Road 

1880 

722 

1 .  96 

1 12,000 

88. 

$840,946 

§1,165 

i88i 

754 

2.  29 

128,000 

1,121,679 

1,488 

1882 

797 

2 .  02 

242,500 

1.857.465 

2,331 

1883 

1.497 

2.  22 

162,700 

98.8 

2,761,293 

1,682 

1884 

2,318 

1 .96 

173.000 

125.8 

5.425.821 

2,341 

1885 

2,496 

1.78 

157,000 

137-8 

5.037.849 

2,019 

1886 

2,718 

1.67 

177,000 

149. 1 

5.574,263 

2,051 

1887 

2.875 

1.63 

187,000 

121 .6 

5,616,428 

1,953 

1888 

3.219 

1-45 

219,000 

129.8 

6,579.443 

2,044 

1889 

3.439 

1-43 

254,000 

121 . 4 

7-521,523 

2.144 

1890 

3.584 

1-4 

305.500 

130.2 

9,146,757 

2,636 

1891 

4,222 

1.38 

298,000 

145.2 

9.750.547 

2.309 

1892 

4.412 

1.4 

278,600 

147-9 

10,084,108 

2,286 

1893 

4.443 

1.23 

308,000 

i53^i 

8.985,997 

2,023 

1894 

4,468 

I .  II 

230,000 

145^ 

4,265,264 

963 

189s 

4,469 

I .  II 

264,000 

163.7 

5,613.582 

1.256 

1896 

4.404 

I-I3 

299,000 

187-5 

7,354.979 

1,670 

1897 

4.375 

I. 14 

220,000 

182.6 

5.356,965 

1,224 

10  mo. 

1898 

4.362 

1 .  06 

371,000 

264.  6 

11,089,838 

2,542 

1899 

4,579 

1.05 

400,000 

277.6 

13,699,222 

2,992 

1900 

4.714 

•99 

468,000 

317-7 

15,626,689 

3.315 

1901 

5,10c 

•94 

478,600 

324-4 

15,920,840 

3.122 

1902 

5.019 

•9 

657,000 

346.73 

20,098,966 

4,004 

1903 

5. 112 

.91 

707,000 

325-73 

22,110,012 

4,325 

1904 

5,262 

.88 

700,000 

339-04 

22,290,032 

4,236 

1905 

5.315 

.832 

820,000 

366.52 

23,914,127 

4.499 

The  figures  were  taken  from  Poor's  Manual. 

Mr.  Hill  was  supposed  to  be  in  control  of  the  management  for  the 
years  1902-5,  which  perhaps  partly  accounts  for  some  of  the  figures. 

net  earnings  of  the  Manitoba  and  Great  Northern  and  of  the 
Northern  Pacific  from  1880  to  1905,  or  from  the  organization  of 
the  Manitoba  till  after  Hill  control  of  the  Northern  Pacific  was 
apparently  well  established.  Since  1893  they  have  both  been  lines 
running  from  St.  Paul  and  Duluth  through  the  border  states  of 
the  Northwest  to  the  Pacific  Coa^t;  and,  although  the  Northern 
Pacific  was  completed  to  Portland  in  i883>  ten  years  before  the 


IN  THIS  COUNTRY.— J.  J.  HILL.  43 

Great  Northern,  yet  both  served  northwestern  Minnesota,  and  from 
1887  on,  the  Great  Northern  was  pushing  its  Hne  west.  They  were 
both  engaged  in  openingup  new  country.  These  similar  condi-  , 
tions  render  the  comparison  of  the  two  Hnes  of  significance  as  an 
indication  of  the  value  of  Hill  management  in  regard  to  some  of 
the  features  now  to  be  discussed. 

The  construction  of  new  lines  has  been  at  a  minimum  cost,  . 
and,  together  with  the  use  of  earnings  for  improvements,  has  re- 
sulted in  a  low  capitalization.  For  instance,  in  1905,  the  total 
capitalization  of  the  Great  Northern  with  5,723  miles  of  road, 
was  but  $225,479,064  as  compared  with  $448,087,500,  the  capitali- 
zation of  the  Northern  Pacific,  whose  mileage  was  5,315.  The 
capitalization  per  mile  of  line  was  respectively  $39,400  and  $84,300. 
The  extensions  made  have  also  fully  justified  their  construction 
by  the  new  traffic  contributed;  but  no  risk  was  ever  run  in  the 
matter  of  extension,  since  no  new  line  was  built  until  the  existing  - 
road  could  support  it.  ^  This  sure  policy  has  had  its  effect;  Great 
Northern  dividends  have  never  failed  or  been  reduced,  but  have 
shown  a  remarkable  regularity  and  a  rise  at  intervals.  Such  elimi- 
nation of  risk  is  an  important  factor  in  the  acquisition  of  a  fortune. 
It  prevents  relapses  and  the  liquidation  of  one's  holdings  at,  panic 
prices.  The  instances  of  sudden  losses  of  wealth  from  this  cause 
are  only  too  numerous. 

We  saw  how,  at  the  very  beginning,  the  Manitoba  used  earn- 
ings freely  for  improvements^  with  future  saving  in  view  and  how 
low  grades  across  the  Rockies  were  similarly  obtained.^  An  ex- 
amination of  the  annual  reports  to  date  shows  that  this  has  been 
the  regular  policy.*  A  result  of  this  policy,  to  a  great  extent,  ' 
is  the  constantly  increasing  train-load  of  the  Great  Northern,  a 
strong  point  with  Mr.  Hill.  Here  the  contrast  with  the  Nort.hem 
Pacific  is  most  marked ;  and  the  economy  in  the  running  of  the 
Great  Northern  is  seen.     Cost  of  haulage  is  reducgjj  tn  aJ3a^ihiium. 


1.  Statement  by  Mr.  Hill. 

2.  Page  29. 

3.  Page  38. 

4.  The  Report  for  1896  says:  "The  policy  of  keeping  the  railways  and 
their  equipment  in  the  highest  state  of  efficiency  has  been  observed,  as 
heretofore."  And  again,  "In  capital  accoimts  appear  only  such  expenditures 
as  were  incurred  for  positive  additions  to  property;  all  outlays  for  every 
kind  of  replacement  having  been  charged  to  operating  expenses." 

In  1898 :  "Out  of  the  net  revenue  for  the  year,  $750,000  were  appro- 
priated toward  cost  of  the  tunnel  now  being  built  through  the  Cascade 
Motmtains." 


44       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

This  condition  has  been  taken  advantage  of  to  reduce  rates. 
The  Great  Northern  certainly  has  led  the  Northern  Pacific  in  this 
regard.  This  state  of  affairs  is  the  more  noteworthy  between 
1883  and  1893,  because  the  Northern  Pacific  had  at  that  time  a 
line  to  the  coast  and  the  accompanying  opportunity  for  a  long 
haul  and  a  low  rate.  The  reports  state  that,  fit  is  the  policy  of 
the  Company  to  reduce  freight  rates  as  rapidly  as  the  volume  of 

\  traffic  and  earnings  will  justify."^  Low  rates  have  played  their 
part  in  increasing  the  freight  and  earnings  ofj^he^road;  the  proper 
rate   secured  the  lumber  traffic;  and   "the  Company's  policy  of 

^making  low  rates  to  its  western  territory  has  enabled  settlers  to 

avail  themselves  of  the  cheap  lands  of  the  West."^ 

Many  other  economies  and  matters  of  policy  have  contributed 

to  earnings\of  which  we  can  only  mention  some  of  the  most  im- 
portant. There  has  been  an  interesting  development  of  inde- 
pendence from  outside  companies  where  this  has  been  possible. 
In  1895  the  Great  Northern  began  to  carry  its  own  insurance,  and 
in  three  years  had  saved  $71,255.81.^  Again,  when  the  contract 
with  the  American  Express  Company  expired  in  1892,  the  Great 
Northern /organized  its  own  express  company,  which  paid  the  rail- 
way the  same  transportation  rates  as  the  American  Express,  and 
in  addition  turned  in  $60,000  net  earnings  the  first  year.* 

The  accounting  system  originated  and  used  by  it  is  recognized 
to  be,  probably,  the  best  in  the  country.  A  very  high  order  of 
efficiency  is  secured. 

The  reports  indicate  the  policy  of  buying  extensive  terminal 
facilities  early  and  thus  saving  considerable  expense  later.  Mr. 
Hill  bought  the  land  for  the  Minnesota  Transfer,  some  five  miles 
from  the  center  of  St.  Paul,  where  the  different  lines  now  exchange 
freight.  He  held  it  a  year  before  he  could  induce  the  other  roads 
to  come  in  with  him.  It  was  regarded  by  many  as  much  too  far 
out  of  the  city ;  but  time  has  proved  the  value  of,  the  location.  * 
In  Duluth,  land  for  terminals  was  purchased  at  a  few  dollars  an 
acre,  years  before  the  road  entered  the  city;  and  facilities  in  Seattle 

1.  Annual  Report  for  1902.  In  the  Report  of  the  Manitoba  for  1887, 
"The  uniform  policy  of  this  Company  has  been  to  meet,  and  even  to  antici- 
pate, the  wishes  of  its  patrons  for  reduced  rates,  by  lowering  its  tariffs  as 
rapidly  as  compatible  with  the  retention  of  means  for  improving  the  property 
up  to,  and  its  maintenance  at,  a  high  standard  of-  efficiency." 

2.  Annual  Report,  1901. 

3.  Annual  Report,  1898. 

4.  Annual  Report,  1893. 

5.  St.  Paul  Pioneer  Press,  Jan.  17,  1906. 


IN  THIS  COUNTRY.— J.  J.  HILL.  45 

were  also  acquired  cheaply.     In  these  two  cases  alone,  very  large 
sums  were  saved  by  early  investment. 

Before  leaving  this  phase  of  the  subject  we  must  notice  one 
matter  in  which  Mr.  Hill  is  a  "specialist," — encouragement  of  good 
farming  along  his  lines.  After..  3r!.L..the  earning  capacity  of  a  road 
depends  upon  the  prosperity  of  the  country  through  which  it  runs. 
First,  it  is  necessary  to  have  desirable  settlers  in  sufficient  numbers; 
and  the  Great  Northern  has  been  fortunate  in  this  regard,  as  large 
numbers  of  hardworking  Scandinavian  immigrants  have  taken  up 
land  in  northern  Minnesota  and  Dakota,  in  addition  to  those 
coming  from  other  parts  of  this  country.  The  road's  lands  have 
been  sold  at  $5  an  acre  to  prevent  their  falling  into  the  hands  of 
speculators;  but  a  rebate  of  $2.50  an  acre  has  been  granted  to 
those  actually  farming,  after  five  years  of  cultivation.  Secondly, 
Mr.  Hill,  through  frequent  speeches  to  the  farmers  in  various  sec- 
tions, encouraging  rotationof  crops,  the  raising  of  live  stock,  the  use 
of  fertilizers  and  irrigation,  has  given  them  the  best  of  advice  how 
to  improve  their  condition  and  increase  the  value  of  their  land 
and  its  product ;  and  freight  rates  are  lowered  to  correspond.  He 
has  also  purchased  and  raised  a  large  number  of  blooded  stock, 
5,000  boars  and  800  or  900  bulls,  at  his  farm  near  St.  Paul,  and 
has  distributed  them  along  the  railway  to  improve  the  quality  of 
livestock  in  those  sections.  ^  These  are  some  of  the  ways  in  which 
Great  Northern  earnings  have  been  increased. 


I.  What  Mr.  Hill  has  done  along  the  line  of  farm  improvement  is 
discussed  in  an  article  by  Mrs.  M.  H.  Severance,  James  J.  Hill,  a  Builder  of 
the  Northwest,   Review  of  Reviews,  June,    1900. 


J 


CHAPTER  III. 

Sfoljn  ©.  Eotfecfeller 

§  I.  i^A^discussion  of  the  causes  of  large  fortunes  would 
scarcely  be  complete  unless  it  included  Mr.  RockefellerJ  But  so 
much  has  been  published  about  how  he  has  acquired  his  fortune 
in  so  far  as  the  means  he  has  employed  are  at  all  known,  that 
any  lengthy  description  of  the  facts  involved  would  be  merely 
transcription  of  widely  read  articles.  What  is  of  more  service  is 
an  examination  in  the  light  of  the  sources  of  certain  fundamental 
matters  of  fact  on  which  previous  writers  have  more  or  less  dif- 
fered, and  an  analysis  of  some  of  the  more  important  causes  pro- 
ducing the  fortune. 

§  2.  In  regard  to  Mr.  Rockefeller's  early  life  we  get  a  good 
deal  from  Miss  Tarbell.  He  was  quiet,  hardworking  and  thrifty. 
He  learned  early  to  save  and  invest  and  to  drive  a  good  bargain. 
At  sixteen  he  was  obliged  to  go  to  vvork,  and  secured  a  clerkship 
in  a  warehouse  on  the  Cleveland  docks.  It  was  not  a  prosperous 
period.  He  earned  twenty-five  to  fifty  dollars  a  month  and  saved 
eight  hundred  dollars  in  two  years.  Following  a  dispute  over 
salary,  he  left  the  clerkship  and  invested  his  $800,  along  with 
$3,200  borrowed  from  his  father,^  with  one  Clark  in  the  produce 
commission  business  on  the  docks.  Together  they  handled  a  large 
trade,  especially  during  the  Civil  War.  The  profits  for  tha»  first 
year  were  $4,400.  He  stayed  in  this  business  from  1857  to  1865. 
,  Beginning  with  1862,  Mr.  Rockefeller  commenced  to  advance 

I  money  to  an  acquaintance,  Andrews,  who  had  entered  oil  refining, 
then  a  wonderfully  promising  young  industry.     The  first  oil  well, 
indeed,  had  been  put  down  only  three  years  before.     In  1865  he  - 
withdrew  from  the  commission  business  entirely  and  [invested  his 
capital  in  the  refinery  of  Rockefeller  and  Andrews_l 

\^  Mr.  Rockefeller  was_J;hus  established  in  the  oil  business  at 
twenty-six  years  of  age.  Many  other  men  were  in  the  same 
business  at  the  same  time,  were  as  favorably  located,  and  had  as 

(good  plants  as  Mr.  Rockefeller?]  It  will  be| interesting  to  see  what 
he  has  done  to  build  up  a  monopoly  of  the  business  while  these 
independent  firms  have  disappeared.^! 


IN  THIS  COUNTRY.— JOHN  D.  ROCKEFELLER.  47 

§  3.     The  first  step  was  to  enlarge  the  size  of  the  plant.     Wil- ) 
Ham  Rockefeller,  S.  T".  Harkness  and  Mr.  Flagler  were  added  to 
the  finn  in   1867;  and  it  was  reorganized  as  Rockefeller,  Andrews 
and  Flagler.*     The  capital  was  increased   say  from  Sioo.ooo  to 
$500,000.^     The  new  plant  not  only  had  a  larger  output  of  oil, 
but  also  manufactured  its  own  barrels.     The  generally  accepted  I 
saving  on  this  item  alone  is  a  cent  and  a  half  a  gallon,  the  price  ■ 
of  barrels  being  four  cents  per  gallon  of  capacity,  the  cost,  two 
and  a  half  cents.     Moreover,  since  he  was  a  large  shipper,  Mr.  < 
Rockefeller  in   1868  received  a  rebate  on  his  oil  from  the  New  1 
York  Central.  ^     Thus  a  larger  outlay  of  capital  in  the  business  at 
this  time  was  doubly  remunerative:  first,  it  increased  the  capacity 
of  the  plant,  and  since  the  demand  for  oil  was  in  excess  of  supply 
at  good  prices,  any  addition  to  capacity  of  output  brought  a  cor- 
responding increase  in  profits;  secondly,  it  permitted  the  securing 
of  certain  economic  advantages  which  were  possible  only  with  the 
larger  plant,  the  saving  on  the  manufacture  of  barrels  and  the 
rebate.     Mr.  Rockefeller  now  had  one  of  the  best  plants  in  the 
country. 

It  may  be  said  that  the  rebate  in  freight  rates  is  not  properly 
to  be  included  among  the  economic  advantages  of  large-scale 
production.  Socially  speaking,  this  is  probably  correct.  But  the 
consensus  of  opinion  is  that  rebates  were  very  generally  paid  at 
this  time,  and  were  to  be  counted  upon  by  the  individual  concern 
much  as  trade  discounts  are  allowed  to  the  large  buyer.  The 
economic  circumstances  of  the  time  resulted  in  rebates  being  paid. 

The  nature  of  these  circumstances  comes  out  very  clearly  in 
the  next  important  move  which  Mr.  Rockefeller  made.  BY1872  v 
there  was  considerable  competition  in  refining.  *  Many  new  stills 
had  been  set  up ;  and  the  combined  capacity  was  greater  than  the 
consumption  required.  At  the  same  time  the  railroads,  the  Penn- 
sylvania, the  Erie  and  the  New  York  Central,  had  lowered  rates 
by  their  competitive  underbidding  to  an  unprofitable  level.  Gould 
with  his  reckless  raids  for  traffic  had  complicated  the  situation; 

1.  Report  of  the  Ijidiistrial  Commission,  1900,  vol.  i,  p.  794. 

2.  G.  H.  Montague,  Rise  and  Progress  of  the  Standard  Oil  Company, 
1903,  p.  6.  The  capacity  of  the  firm  at  this  time  was  600  barrels  of  refined 
a  day.     Investigation  of  Trusts,  Congress,   1888,  p.   288. 

3.  Affidavit  of  J.  H.  Devereux,  vice-president  of  the  Lake  Shore. 
Ida  M.  Tarbell,  History  of  the  Standard  Oil  Company,   1904,  appendix  3. 

4.  Information  furnished  by  Mr.  Dodd,  solicitor  for  the  Standard  Oil 
Company.      Report  of  the  Industrial  Commission,  1900,  vol.  i,   p.  799. 


48       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

and  there  seemed  to  be  no  way  for  the  roads  to  act  together  and 
secure  better  rates.  Unrestricted  competition  was  bringing  loss  to 
both  the  oil  trade  and  the  railroads.  Some  form  of  united  action 
.;  was  needed.  The  railroads  failed  to  find  it;  and  a  group  of  refiners 
seized  upon  the  opportunity.     They  combined  to  relieve  the  situa- 

Ition,  to  establish  harmony;  and  in  doing  so  substantially  forwarded 
their  own  interests.     They  first  organized  the  South  Improvement 
, Company/  Mr.  Rockefeller  and  his  associates  owning  almost  half 
I  of  the  stock.     Tins  company  represented  one-tenth  of  the  refining 
'[Capacity  of  the  country;^  and  it  agreed  with  the  railways  to  ship 
,'  oil  over  the  different  routes  to  the  seaboard  in  such  amounts  that 
,-  each  road  would  secure  a  fixed  per  cent  of  the  total  traffic.     Having 
i  insured  to  it  a  certain  amount  of  oil  freight  and  no  more,  there 
I  would  remain  no  reason  for  any  road  to  reduce  its  rate.     In  return 
f  for  this  service  of  "evening"  the  traffic  the  railwa3^s  promised  the 
'   members  of  the  South  Improvement  Company  a  rebate  of  from 
1    twenty  to  fifty  per  cent  on  its  oil  shipments  and  a  like  drawback 
i   on  the  shipments  of  others,  f    This  service  was  worth  much  to  the 
i   roads.     It  enabled  them  to  more  than  double  their  rates  in  some 
j    cases.     In  fact  the  new  tariff  with  the  rebates  above  mentioned 
subtracted  was  as  high  as  the  old  one;*  that  is,  the  rebate  really 
amounted  to  an  increase  of  the  old  rates  to  all  others  except  the 
V   favored  shippers.     Such  is  the  value  of  harmony  among  competing 
rgjlcgads. 
Ijr^  With  the  contracts  for  these  rebates  in  hand,  Mr.  Rockefeller 

I      and  his  partners  went  to  the  owners  of  the  various  Cleveland  re- 

I  fineries  and  induced  most  of  them  to  sell  out.     It  would  be  im- 

II  possible  for  them  to  live  in  competition  with  those  who  had  the 
I      advantage  of  a  dollar  a  barrel  in  freight  charge^  Where  the  costs 

1.  True  it  is  said  that  the  idea  of  this  company  originated  with  the 
railway  men;  but  they  played  a  minor  role  in  working  out  the  idea,  and 
held  only  a  small  per  cent  of  the  company's  stock.  Certainly  the  railroads 
failed  to  form  a  pool  or  reach  any  such  agreement  to  regulate  traffic. 

2.  Ida  M.  Tarbell,  History  of  the  Standard  Oil  Company,   1904,    vol.  i, 

PP-  58-59- 

3.  The  contract  is  given  in  the  Report  of  the  Industrial  Commission, 
1900,  vol.  i,  pp.  610  ff. 

4.  New  TariflE 

Old  Rebate         Regular 

Rate      Subtracted        Rate 

Oil  City  to  Cleveland 35c  40c  80c 

Warren,  Pa.,  to  New  York S7C  Sr.50  $2.56 

Ida  M.  Tarbell,  History  of  the  Standard  Oil   Company,   1904,  vol.,  i, 
p.  71,  and  appendix  5, 


IN  THIS  COUNTRY.— JOHN  D.  ROCKEFELLER.  49 

of  competitors  are  equal  in  most  particulars,  and  where  they  have 
reduced  to  a  very  small  margin  the  difference  between  cost  and 
price,  as  was  the  case  in  refining  at  this  time,  then  a  lessening  in 
some  one  item  of  expense  to  certain  competitors  means  all  the 
difference  between  profit  and  loss,  between  survival  and  failure. 
So,  in  the  present  case, [the  general  rise  in  freight  rates  to  all  out- 
side the  South  Improvement  Company  meant  the  wiping  out  of 
their  profits;  and  when  the  Cleveland  refiners  saw  the  contracts, 
practically  all  of  them  sold  out  to  Mr.  Rockefeller  for  cash  or  for 
stock  in  the  Standard  Oil  Company  of  Ohio.  ^  This  company  was 
incorporated  in  1870  with  $1,000,000  capital  stock  as  the  successor 
of  Rockefeller,  Andrews  and  Company;  and  in  1872  it  increased 
its  stock  to  $2,500,000  to  supply  the  cash  and  securities  for  the 
expansion  just  mentioned.  The  Standard  Oil  Company,  then,  by 
this  single  stroke  became  much  the  largest  refiner  of  oil  in  the 
United  States.  Its  output  was  increased  from  1,500  barrels  a  day, 
or  less  than  4  per  cent  of  the  total  product  of  the  country,  to 
10,000  barrels,  or  over  20  per  cent  of  the  total.  ^  In  combination 
with  others  its  owners  secured  rebates  from  the  railways  and  used 
their  monopoly  position  to  force  others  to  sell  to  them. 

The  Cleveland  refiners,  however,  were  too  hasty  in  disposing 
of  their  property,  because  the  rebates  in  rates  never  took  effect. 
The  other  rivals  of  the  South  Improvement  Company,  especially 
the  refiners  located  in  the  oil  fields  and  the  owners  of  the  wells, 
fought  the  company  bitterly,  knowing  as  they  did  that  with  such 
concessions  it  was  bound  to  become  a  monopoly.  This  combined 
hostility  brought  the  railroads  to  time;  and  they  rescinded  the 
rebate  contracts.     They  defended  their  action  in  entering  into  the 

1.  Considerable  testimony  bears  out  the  fact  of  this  rather  important 
transaction : 

(a)  Testimony  of  Mr.  Alexander  and  Mr.  Doane,  the  former  a  Cleveland 
refiner,  before  a  Committee  of  the  House  of  Representatives,  1872.  Quoted 
by  Miss  Tarbell  at  pages  64  and  65,  vol.  i. 

(b)  Testimony  of  Frank  Rockefeller  before  Congress,  1876.  Tarbell, 
ibid. 

(c)  Affidavit  of  George  O.  Baslington  of  the  firm  of  Hanna,  Baslington 
and  Company,  Cleveland,  to  the  effect  that  they  sold  to  the  Standard  Oil  ^ 
Company  in  February,  1872,  a  refinery,  which  had  cost  $76,000  and  whose 
earnings  made  it  worth  $roo,ooo,  for  $45,000  cash,  because  they  discovered 

that  the  Standard  had  already  bought  up  most  of  the  Cleveland  refineries 
and  had  secured  very  favorable  rates.  Ida  M.  Tarbell,  History  of  the 
Standard  Oil  Company,   1904,  appendix  7. 

2.  Investigation  of  Trusts,  Congress,  1888,  p.  288,  and  Ida  M.  Tarbell, 
ibid.,  vol.  i,  pp.  67  and  68. 

D 


Is 


50       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

obnoxious  contracts  on  the  ground  of  a  misunderstanding  with 
regard  to  the  nature  of  the  South  Improvement  Company,  having 
supposed  that  it  represented  a  great  majority  of  both  refiners  and 
well-owners.  Now,  that  it  became  apparent  that  only  a  small 
per  cent  of  the  shippers  were  to  benefit,  they  were  ready  to  annul 
the  agreement.  Further,  the  Pennsylvania  legislature  repealed 
the  charter  of  the  South  Improvement  Company. 

The  check  given  to  combination  by  the  dissolution  of  the 
South  Improvement  Company  was  only  temporary.  Very  shortly 
I  after  the  repeal  of  the  rebate  contracts,  the  Standard  Oil  Company 
land  other  refiners  representing  four-fifths  of  the  capacity  of  the 
Icountry  formed  an  association  ^  and  succeeded  in  raising  the  price 
of  oil  considerably.  ^  But  the  agreement  was  in  the  nature  of  a 
pool,  and  suffered  the  usual  fate  of  those  voluntary  associations: 
members  failed  to  live  up  to  their  promises;  misunderstandings 
arose;  and  in  1873  the  pool  broke  up. 

This  form  of  combined  action  failing,  I  Mr.  Rockefeller  returned 
to  the  plan  of  purchase.  He  bought  up^'three  of  the  largest  re- 
fineries in  the  country,  those  of  Charles  Pratt  and  Company,  New 
York,  Warden,  Frew  and  Company,  Philadelphia,  and  Lockhart, 
Frew__ajl4  Company,  Pittsburg,  the  last  two  being  purchased 
secretly.  ^  \  The  stock  of  the  Standard  Oil  Company  was  increased 
$1,000,000  to  effect  the  purchase.  Since  it  was  secret,  the  re- 
fineries continued  to  be  operated  under  the  old  names.  The  union 
was  beneficial  to  the  parties  concerned  in  several  ways.  In  the 
first  place  there  was  the  ever  present  advantage  of  rebates  to  the 
large  shipper.  The  railways  had  finally  got  together,  and  in  1874 
established  a  blanket  rate  for  all  refineries  from  the  well  to  the 
Atlantic ;  that  is,  the  sum  of  the  rate  on  crude  to  the  refinery  and 
the  rate  on  refined  to  New  York  or  Philadelphia  was  the  same  for 
every  refiner   regardless  of  distance.'*     This,   of  course,    put  the 

1.  Ida  M.  Tarbell,  History  of  the  Standard  Oil  Co?npany,  1904,  vol.  i, 
p.  109. 

2.  Chart  of  the  Prices  of  Crude  and  Refined  Oil,  Report  of  the  Industrial 
Commission,   1900,  vol.  i,  Part   i,  opp.  p.  52. 

3.  Ida  M.  Tarbell,  ibid.,  vol.  i,  pp.  146-8.  The  statement  there  is  based 
on  information  secured  directly  from  Mr.  Lockhart,  and  on  Mr.  Flagler's 
testimony  in  the  Investigation  of  Trusts,  Congress,  1888,  p.  770. 

4.  The  "Rutter  Circular,"  Report  of  the  Industrial  Commission,  1900, 
vol.  i,  p.  641. 

The  circular  also  provided  that  a  rebate  of  22  cents  per  barrel  be  paid  to 
those  pipe-lines  which  maintained  agreed  rates  of  pipeage.  Mr.  Rice, 
ibid.,  p.  695,  and  Miss  Tarbell,  vol.  i,  p.  143,  state  that  this  rebate  went  only 


IN  THIS  COUNTRY.— JOHN  D.  ROCKEFELLER.  51 

Standard  Oil  Company  in  Cleveland  on  an  equality  with  the  plants 
of  Pittsburg  and  New  York,  as  far  as  an  advantage  of  location 
was  concerned,  although  oil  brought  to  Cleveland  was  subject  to 
the  extra  haul  of  a  hundred  miles  or  more  west  from  the  wells  of 
Pennsylvania  and  back  again.  Certainly  the  Standard  Oil  Com- 
pany in  this  pooling  agreement  of  the  railroads  received  recogni- 
tion of  its  position  as  a  large  shipper.  But,  when  it  further  in- 
creased its  strength  by  uniting  with  the  three  firms  mentioned 
above,  it  secured  in  addition  a  ten  per  cent  reduction  on  the  pool 
rate.  ^ 

Moreover,  this  combination  was  the  working  basis  for  secur-j 
ing  a  practically  complete  monopoly  of  the    business  of  refining.] 
The  Central  Association  for  refiners  was  organized  in  1875  in  which 
Mr.  Rockefeller  and  his  associates  played  the  chief  part.     A  refiner; 
could  lease  his  plant  to  this  association  and  himself  still  retain 
control  of  the  process  of  refining.     The  association,  however,  was 
to  fix  the  price  paid  for  crude  and  at  which  refined  could  be  sold,    ) 
and  was  to  control  freight  rates.  ^  independent  refiners  now  joined 
this  association  or  sold  out  to  one  of  the  concerns  secretly  owned     \ 
by  the  Standard.     The  Acme  Oil  Company  and  the  Standard  Oil 
Company  of  Pittsburg,  also  controlled  by  Mr.  Rockefeller  and  his 
associates,  purchased  other  plants  and  hastened  the  process  of 
consolidation.     In  these  ways,  by  1876  such  a  monopoly  of  the  re- 
fining business  had"  been  secured  that  in  the  autumn  of  J  hat  year 
the  price  of  oil 'was  raised  temporarily   100  per  cent,  ^j Several 
considerations  had  induced  men  to  sell  to  the  members  of  the 
association  or  to  join  it.     In  the  first  place,  prices  were  low  and 
men  were  ready  to  sell;  in  the  second  place,  the  members  of  the 
association  secured  rebates  and  were  surer  of  being  able  to  secure 
cars — the  association's  position  as  the  large  and  favored  shipper 
had  by  this  time,  through  growth,  become  unassailable — ;  in  the 
third  place,  the  control  of  these  new  companies  by  the  Cleveland 
men  was  secret;  and  an  independent  in  Pittsburg  would  sell  out 


to  the  pipe-lines  in  a  pool  connected  more  or  less  with  the  Standard  Oil 
Company ;  but  just  why  other  pipe-lines  could  not  maintain  the  agreed  rates 
and  so  secure  the  22  cents  is  not  clear. 

1.  Ida  M.  Tarbell,  History  of  the  Standard  Oil  Company,  1904,  vol.  i, 
p.  151,  based  on  testimony  of  Mr.  Blanchard,  General  Freight  Agent  of  the 
Erie,  ibid.,  appendix  26. 

2.  Ida  M.  Tarbell,  ibid.,  vol.  i,  pp.    148-9. 

3.  Vide  supra,  p.  50,  note  2. 


52       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

to  his  neighbor,  Mr.  Lockhart,  when  he  would  absolutely  refuse  to 
let  Mr.  Rockefeller  have  his  plant. ' 

The  new  organization  was  soon  to  have  its  strength  tested. 
Following  the  opening  of  the  Bradford  oil  fields  in  1876  and  the 
increased  output  of  crude  oil,  together  with  the  arbitrary  advance- 
ment of  the  price  of  refined  in  that  year,  new  independeiit  refineries 
^y  sprang  up.  Moreover,  the  Empire  Transportation  Company,  the 
pipe-line  feeder  of  the  Penns)'lvania  Railway,  began  its  famous 
fight  against  the  Standard  Oil  Company  now  that  the  latter's 
monopoly  had  become  apparent.  The  pipe-line  company  was  sup- 
ported by  the  railroad  in  the  fierce  price-cutting  contest  which 
followed ;  but  the  Standard  Oil,  with  its  excellent  organization  and 
large  surplus  and  the  assistance  of  the  New  York  Central  and 
Erie  roads,  was  found  to  have  the  greater  endurance,  and  forced 
the  Empire  Transportation  Company  to  sell.  It  was  a  contest  in 
which  capital  was  important;  the  Standard  had  the  greater  re- 
sources and  was  the  victor.  With  the  victory  went  a  monopoly  of 
the  pipe-lines.  In  addition,  the  railways  had  learned  their  lesson. 
None  of  them  was  likely  again  actively  to  oppose  the  oil  company. 
They  consented  to  an  agreement  by  which  the  Standard  and  allied 
concerns  were  to  receive  a  10  per  cent  rebate  or  commission^  for 
guaranteeing  to  the  different  roads  fixed  percentages  of  the  total 
traffic.  Later  there  was  added  to  the  10  per  cent  rebate  a  draw- 
back of  22^  cents  per  barrel  on  all  crude  oil  transported,  an 
arrangement  similar  to  the  one  of  1872.^  This  contest  left  the 
Standard  Oil  Company  in  a  very  strong  position.  In  addition  to 
the  ownership  of  practically  all  the  refineries,  it  controlled  the  pipe- 
lines and  could  make  it  difficult  for  formidable  rivals  to  secure 


1.  Ida  M.  Tarbell,  ihid.,  vol.  i,  pp.  154-161. 

2.  Ida  M.  Tarbell,  History  oj  the  Standard  Oil  Company,  1904,  appen- 
dices 27  and  28;  and  Investigation  of  Trusts,  Congress,  1888,  pp.  774-5- 

3.  Ida  M.  Tarbell,  ibid.,  appendices  29  and  30;  and  Report  of  the  In- 
dustrial Commission,  1900,  vol.  i,  pp.  386-7. 

There  is  some  doubt  as  to  whether  this  223^  cents  was  a  rebate.  It 
was  allowed  to  the  American  Transfer  Company,  a  pipe-line  associated  with 
the  Standard.  Mr.  Flagler,  of  the  Standard  Oil  Company  (citation  supra, 
appendix  30),  testified  before  the  Congressional  Committee  in  1888,  that 
the  allowance  was  made  to  the  pipe-line  by  the  roads  for  its  service  in  col- 
lecting oil;  that  while  it  may  have  levied  in  addition  a  nominal  charge  on 
the  shipper  of  oil,  yet  it  depended  really  on  this  22}/^  cents  for  its  gross 
receipts.  Mr.  Archbold,  of  the  Standard  Oil  Company,  simply  stated  before 
the  Industrial  Commission  in  1900  (p.  515)  that  the  22 J^  cents  was  the 
pipe-line's  share  of  a  through  rate;  and  Mr.  Montague  adopts  this  view  (p.  59 
of  the  Rise  and  Progress  of  the  Standard  Oil  Company).     Contra,  however. 


UNIVERSITY 

Of 


8ITY  I 


IN  THIS  COUNTRY.— JOHN  D.  ROCKEFELLER.  53 

crude  oil.  The  railways  had  learned  from  their  own  weakness  its 
strength  and  were  bound  to  support  it,  to  give  it  rebates  and 
drawbacks  and  to  make  whatever  rates  might  be  necessary  to  meet 
competitors  which  should  appear. 

[By  1879  the  Standard  had  built  up  a  more  complete  monopoly 
than'Tt  has  to-day.  It  then)  controlled  90  to  95  per  cent  of  the 
oil-refining  business  as  compared  with  5  per  cent  in  187 2. ''^  What 
were  the  causes  which  brought  this  about? 

§  4.  It  is  said  that  the  monopoly  was  almost  entirely  the 
result  of  rebates.  We  have  seen  that  they  certainly  were  one 
element  in  its  growth.  Just  how  important  an  element,  is  perhaps 
best  shown  by  the  accompanying  table  giving  the  chief  rebates  of 
which  there  is  evidence  to  show  that  they  were  paid  to  the  Standard 
Oil  men  during  this  period  up  to  1879.  The  first  column  gives  the 
date  of  the  rebate  and  the  person  or  corporation  to  whom  paid; 
the  second  gives  the  amount  of  the  rebate  and  the  service  rendered 
in  exchange;  the  third  column,  the  advantage  accruing  to  the 
recipient  thereby;  the  fourth,  evidence  as  to  rebates  received  by 
others  at  the  time.  This  table  is  no  doubt  incomplete  in  many 
features;  for  instance,  there  were  very  probably  other  rebates  paid 
of  which  we  know  nothing;  and  there  were  in  1877  and  1878,  and 
doubtless  before,  terminal  and  lighterage  charges  allowed  to  the 
Standard,  of  the  fairness  of  which  one  cannot  well  judge  without 
familiarity  with  the  usual  charges.  Yet  there  are  some  conclu- 
sions which  the  evidence  given  seems  to  justify.  Mr.  Rockefeller's  j 
refining  interests  received  rebates  almost  continuously  during  the 
period  up  to  1879.  Most  of  the  time  these  rebates  were  competi- 
tive in  nature,  others  receiving  them  also,  though  not  so  systemati- 
cally as  the  Standard,  the  largest  shipper.     But  in  two  cases,  in 

there  are  two  important  considerations:  First,  the  letter  in  which  Mr. 
O'Day  asks  for  the  allowance  (citation  supra,  appendix  29)  offers  as  the 
quid  pro  quo  co-operation  "in  every  effort  to  secure  for  the  railroads  paying 
rates  of  freight  on  the  oil  they  carry"  rather  than  the  service  of  carrying  oil, 
and  in  other  ways  indicates  that  something  other  than  a  pipe-line  per  cent 
of  a  through  rate  was  being  sought.  Second,  the  223^  cents  were  paid  on  all 
oil  shipped,  whether  handled  by  the  American  Transfer  Company  or  not. 
Certainly  allowance  on  other  oil  not  transported  by  them  was  a  drawback 
and  not  a  pipe-line's  per  cent  of  a  through  rate.  Citations  supra,  appendix 
29,  and  Report  of  the  Industrial  Commission,   1900,  vol.  i,  pp.  386-7. 

I.  Testimony  of  Mr.  Rogers  before  the  Hepburn  Commission  in  1879. 
cited  in  the  Report  of  the  Industrial  Commission,  1900,  vol.  i,  pp.  646-7,  note, 

The  per  cent  of  refined  produced  by  the  Standard  in  1894-8  ran  from 
81.4%  to  83.7%;  Mr.  Archbold,  tbid.,  p.  560. 


64       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

1872  and  in  1877-9,  the  rebates  went  to  one  association  alone,  the 
one  to  which  Mr.  Rockefeller  belonged,  and  proved  of  great  ad- 
vantage to  it  in  destroying  competition. 

It  was  natural  that  Mr.  Rockefeller  should  receive  rebates. 
His  refineries  at  Cleveland  were  located  where  they  had  a  choice 
of  the  Erie  or  New  York  Central  Railways,  or  the  Lake  and  the 
Erie  Canal,  as  a  means  of  transportation  to  the  seaboard.  The 
competition  of  these  carriers  to  secure  traffic  from  each  other 
would  lead  to  rebates  such  as  the  ten  per  cent  granted  by  the 
Erie  in  1875;  their  desire  to  build  up  the  refining  interest  at  Cleve- 
land, a  point  which  they  served,  as  against  Pittsburg  or  the  well- 
regions,  territory  of  the  Pennsylvania  road,  would  induce  them  to 
meet  the  latter's  rates,  as  in  1868  and  18 £2^ J  Moreover,  the  growth 
of  the  Standard  and  the  fact  that  most  of  the  time  it  was  the 
largest  shipper  of  oil,  would  increase  its  value  as  "evener"  of  traffic 
and  force  any  road  to  grant  it  favorable  rates  if  it  desired  to  retain 
its  traffic,  so  that  finally,  in  1877,  with  the  Empire  Transportation 
Company  sold  out,  it  'alone  could  keep  peace  among  the  roads'  and 
secure  the  advantageous  rebates  of  that  and  the  following  years. 

The  primary  cause  of  combination  and  monopoly  in  the  oil 
business,  however,  was  not  rebates,  though  they  may  have  hastened 
by  several  years  its  realization.  It  was,  as  we  shall  see  in  the 
j'next  section,  rather  the  very  general  desire  to  eliminate  unrestricted 
competition  and  its  losses,  combined  with  Mr.  Rockefeller's  success 
in  finding  a  way  to  bring  about  this  result. 


IN  THIS  COUNTRY.— JOHN  D.  ROCKEFELLER. 

REBATES  RECEIVED  BY  MR.  ROCKEFELLER 
AND  ASSOCIATES— 1868-79.1 


55 


Date 

Recipient 

Amount  and 

Advantage  to 

Were  others  receiving 

Service  Rendered 

Recipient 

like  rebates 
Yes.     No. 

1868£f. 

To    Rockefeller, 

To  "handle  oil  as 

Better  rates  than 

Pennsylvania  Ry. 

Andrews  <fe  Co., 

cheaply  as  the  Penn- 

other  Cleveland    re- 

was gi\Tng  low  rates. 

Cleveland.    From  N. 

sylvania   Ry."     Re- 

finers,    at     a     time 

not     necessarily     re- 

Y. Central. 

mained  at  Cleveland 

when      prices      were 

bates,    to    refiners   of 

and  pushed  refining 

falling. 

westemPennsylvania. 

there. 

1872 

To  members  of  the 

20%      to        50%, 

Used  to  force  the 

South     Improve- 

South Improvement 

both     rebates     and 

great     majority     of 

ment  Co.  alone   to 

Co. 

drawbacks.     (Con- 

Cleveland refiners  to 

receive   the  conces- 

From   N.    Y."  C, 

tract    rescinded    be- 

sell out  to  the  Stand- 

sions,   which    were 

Erie,    and    Pennsyl- 

fore it  took  effect). 

ard    Oil    at   reduced 

most    unreasonable 

vania. 

For  service  as 
evener. 

valuations. 

in  amount. 

1872ff. 

A   week   after   re- 

S0.25 on  the  $1.50 

Nullified  gains  se- 

Rebates allowed  by 

scission  of   Southern 

rate  on  refined. 

cured    by    competi- 

Pa.   to    the    Empire 

Improvement     Co.'s 

Cleveland     to     New 

tors  in  Pennsylvania 

Transportation  Co.  (a 

contracts.  To  Stand- 

York. 

through  victory  over 

pipe   line),    and    per- 

ard Oil  Co.  and  prob- 

Large shipper. 

the  South  Improve- 

haps also  to  shippers. 3 

ably  later  to  mem- 

ment Co. 

bers  of  the  refiners' 

pool.  2 

1875ff. 

To    Standard    Oil 

10%  to  secure 

Served  in  building 

Company. 

traffic. 

up  the  company  and 

Large  commissions 

From  the  Erie  at 

inducing     independ- 

being     allowed      the 

least. 

ents  to  sell. 

Empire     Transporta- 
tion Co.  by  the  Penn- 
sylvania. 4 

1877-9 

To    Standard    Oil 

10%  on  crude  oil. 

Effective  in   driv- 

Only the  Stand- 

Co. and  plants  under 

In  addition,  in  18- 

ing  independents  out 

ard  received    these 

its  control. 

78-9,  22  V2  cents  per 

of  business,  who  had 

rates.     1 1  a  1  one 

From  all  roads. 

barrel   on    all   crude 

entered  refining  with 

could    keep  peace 

oil  shipped. 

the    high    prices    of 

between  the  roads. 5 

For  service  as 

1876. 

evener. 

1.  Most  of  the  sources  giving  evidence  of  these  rebates  have  already 
been  cited  in  the  text.  The  others  are  referred  to  under  the  different  cases 
given. 

2.  Ida  M.  Tarbell,  History  of  the  Standard  Oil  Company,  1904,  voL  i, 
p.  100,  and  appendix  14. 

3.  Ibid.,  appendix  18. 

4.  Ibid.,  appendix  26. 

5.  Ibid.,  vol.  ii,  pp.  8-1 1,  and  Report  of  the  Industrial  Commission,  1900, 
vol.  i,  p.  698. 


56       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

§  5.  Mr.  Moody  in  his  "Truth  about  the  Trusts,"  calls  the 
Rockefeller  financiers  "the  real  fathers  of  the  trust  idea  in  this 
country."  Mr.  Rockefeller  and  his  associates  were  in  the  pos- 
session of  a  great  industrial  idea,  Combination,  and  were  pioneers 
in  the  field.  The  development  of  this  trust  idea  is  the  central 
feature  of  his  career;  and  a  study  of  how  the  trust  or  combination 
was  organized,  and  how  its  advantages  as  buyer,  transporter,  re- 
finer and  seller  of  oil  have  been  worked  out,  should  afford  a  fairly 
clear  view  of  the  essential  causes  of  his  fortune. 

(a)  The  unrestricted  competition  of  the  early  seventies  in  oil 
■^irefining  as  in  other  great  industries  of  the  country,  demanded  some 
working  agreement  between  the  concerns  interested  if  great  over- 
! production  was  to  be  avoided,  if  alternate  periods  of  speculation 
and  shut  down  were  to  be  prevented  and  steady  profits  insured. 
The  steel  industry  in  the  seventies  and  eighties  is  a  good  example 
in  another  line  of  activity  of  extensive  building  of  plants  in  pros- 
perous times,  followed  by  failure  when  depression  came.  The 
common  form  of  agreement  resorted  to  at  that  time  to  regulate 
competition  was  the  pool;  but  its  permanence  and  value  in  most 
cases  is  well  shown  by  the  fate  of  the  refiners'  pool  in  1872-3. 
\Mr.  Rockefeller  realized  in  1873  the  suprem^e  importance  of  combi- 
nation. He  saw  the  economies  of  the  large  sized  plant  in  his  own 
refinery  at  Cleveland ;  he  had  experienced  the  losses  from  competi- 
tion ;  and  he  knew  from  the  case  of  the  South  Improvement  Company 
the  favors  which  the  large  shipper  could  secure  from  the  railways. 
He  also  had  a  striking  example  before  him  to  show  the  futility  of 
the  pool.  Under  these  circumstances  he  and  his  associates  appear 
to  have  gone  to  work  to  build  up  a  combination  which  would  con- 
trol the  oil  industry  and  would  endure.  By  1876,  as  we  have  seen, 
most  of  the  refineries  were  combined  through  actual  ownership  by 
the  Standard  Oil  or  allied  corporations  or  through  lease  of  their 
plants  to  the  Central  Refiners'  Association.  In  1882  the  organiza- 
tion was  made  more  permanent  and  uniform  by  the  formation  of  the 
V  famous  Oil  Trust,  the  first  of  the  Trusts.  This  was  no  halfway 
measure  in  combination,  but  amounted  to  securing  control  of 
practically  the  entire  industry  and  giving  it  a  solid  organization. 
The  trust  was  dissolved  by  the  courts  in  1892 ;  but  the  organization 
seems  to  have  continued  under  a  community  of  interest  plan  of 
the  few  men  who  made  up  the  majority  stockholders  until  it  was 
again  given  permanent  form  in  1899  as  a  New  Jersey  holding 
corporation. 


IN  THIS  COUNTRY.— JfHN  9.  ROCKEFELLER.  57 

The  methods  which  have  been^  used  to  build  up  an  efficient 
and  monopolistic  business  we  may  discuss  under  two  heads:  first, 
those  involving  economic  benefits  to  the  community;  second, 
methods  not  involving  such  benefits,  methods  often  spoken  of  as 
monopolistic.  It  is  the  purpose  to  show  in  each  case  what  is  the 
value  of  the  trust  idea,  what  particular  effectiveness  the  size  of 
the  concern  has  given  to  the  methods  used. 

(b)  The  Standard  Oil  Compa^^  has  done  admirable  con- 
structive work  along  the  lines  connected  with  the  handling  of 
petroleum.  First,  in  regard  to  the  pipe-lines.  As  early  as  the 
sixties  these  were  used  to  carry  oil  from  the  wells  to  the  railroads 
and  replace  the  expensive  process  of  teaming.  In  the  seventies, 
a  few  large  companies  had  secured  control  of  the  greater  part  of 
these  lines  running  from  the  scattered  wells  to  railroad  terminals. 
The  Standard  bought  up  several  of  them;  and,  when  in  1877  the 
Empire  Transportation  Company  also  yielded,  it  had  fairly  com- 
plete control  of  the  business.  Since  then  it  has  ably  fulfilled  the 
duty  of  supplying  all  new  wells  with  pipes  as  they  have  been 
opened  up.  It  is  an  undertaking  requiring  large  capital;  and  the 
Standard  has  supplied  the  capital.  As  soon  as  new  oil  fields  have 
been  discovered  in  Pennsylvania,  in  West  Virginia  and  elsewhere, 
the  pipe-line  companies  of  the  Standard  have  gone  in  and,  at  an 
expense  of  millions,  provided  the  wells  v/ith  pipes  and  with  storing 
tankage.  ^  The  producer  is  allowed  cash  or  certificates,  which  are 
redeem.able  at  any  time,  for  oil  collected  from  his  well;  and  all 
producers,  great  and  small,  are  paid  the  same  price. ^  A  concern 
which  is  first  in  the  field  and  liberal  in  investing  capital  will  reap 
many  advantages,  much  as  does  a  railroad  run  through  a  new, 
but  rich  country.  It  will  have  a  large  traffic  at  remunerative 
rates,  and  will  secure  oil  at  a  reasonably  low  figure.  For  a  time, 
at  least,  it  will  be  free  from  competition;  and  rival  lines  may  not 
care  to  enter  at  all  unless  the  traffic  is  especially  heavy.  Such 
advantages  the  Standard  has  legitimately  gained  in  the  laying  of 
pipe-lines. 

Early  in  the  eighties  it  was  demonstrated  that  pipe-lines  were 
not  only  the  best  means  for  getting  the  oil  from  the  wells  to  the 
cars,  but  were  much  more  economical  than  the  railroads  for  trans- 
portation over  long  distances.     Here  again,  the  Standard  has  in- 


1.  Report   of  the  Industrial  Commission,    1900,   voL   i,  p.    581   and  pp. 

471-4- 

2.  Ibid.,  p.  2S^.     Gunton's  Magazine,  Feb.  1904,  voL  xxvi,  pp.   102-104. 


58       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

vested  its  capital,  though  not  the  first  to  build  a  long  distance  line, 
and  today  has  numerous  pipes  from  the  Appalachian  System  to 
the  seaboard,  with  one  line  extending  west  to  Whiting,  Indiana, 
and  on  to  the  Kansas  field.  The  crude  oil  is  pumped  through 
these  long  lines  from  the  wells  to  the  refineries  at  small  expense. 
Oil  is  now  run  from  Oklahoma  to  be  refined  at  New  York  Harbor. 
The  refineries,  then,  can  be  built  where  they  are  most  convenient 
to  the  market  without  regard  to  the  location  of  the  wells.  The 
Standard  has  put  its  largest  plants  on  the  seaboard,  convenient 
for  the  export  trade,  the  next  in  size  at  Whiting  to  supply  the 
Central  States, — locations  which  have  saved  much  in  freight  and 
added  greatly  to  the  profits.  ^ 

The  Standard  has  also  been  active  in  developing  the  advantages 
of  the  large  concern  in  the  refining  and  sale  of  oil.  It  maufactures 
a  very  great  number  of  by-products,  and  has  a  large  plant  in 
western  New  York  especially  for  the  preparation  of  lubricating 
oils.  It  has  been  successful  in  finding  a  means  of  freeing  Lima 
crude  oil  from  sulphur  and  making  the  refined  article  salable,  a 
discovery  which  has  made  it  possible  to  draw  upon  a  ver\^  large 
supply  of  cheap  crude  oil.  ^  It  has  a  large  and  most  economical 
establishment  for  the  manufacture  of  tin  cans  on  Long  Island, 
convenient  to  the  incoming  tin  supply  from  Wales.  These  are 
economies  which  a  concern  with  but  one  or  two  refineries  cannot 
achieve.  Again,  the  Standard  has  agents  permanently  located  in 
certain  districts  to  supervise  the  sale  of  oil;  and  it  prepares  new 
brands  of  oil  to  meet  the  demand.  It  has  constructed  tank  steam- 
ers and  barges;  it  has  built  up  a  tremendous  export  trade,  and 
competes  with  the  oil  of  Russia  and  Sumatra  in  the  emporiums  of 
the  world.     The  market  is  thoroughly  organized.^ 

Such  are  the  advantages  which  necessarily  go  with  the  large 

size  of  the  company;  and  the  Standard  Oil  Company  is  noted  for 

the  degree  to  which  it  has  utilized  its  opportunities  in  this  line. 

:  We  may  also  mention  in  passing  certain  features  which  redound 

?  to  its  credit,  the  more  so  as  they  are  not  dependent  on  size  for 

i  existence:  the  perfection  of  organization,  the  discipline,  the  pension 


1.  Report  on  the  Transportation  of  Petroleum,  Commissioner  of  Corpora- 
tions, 1906,  pp.  44-56. 

2.  Report  of  the  Industrial  Commission,   1900,  vol.  i,  pp.  570    and  627. 
Ida  M.  Tarbell,  History  of  the  Standard  Oil  Company,   1904,  vol.  ii,  p.   249. 

3.  Report  of  the  Industrial  Commission,    1900,   vol.   i,    p.    796  and  pp. 
799-800. 


IN  THIS  COUNTRY.— JOHN  D.  ROCKEFELLER.  59 

system'  and  the  establishment  of  working  relations  with  the 
employees  which  have  avoided  strikes.  This  discipline  and 
organization  would,  in  themselves,  make  an  effective  industrial 
unit  yielding  excellent  profics. 

(c)  The  second  type  of  methods  above  referred  to,  of  which 
the  Standard  Oil  Company  has  made  use  to  increase  its  profits, 
are  those  where  no  general  economic  advantage  results  to  society, 
but  where  the  company  is  pursuing  exclusively  its  own  interest. 
The  effectiveness  of  these  methods,  also,  is  greatly  enhanced  by 
the  size  of  the  corporation.  They  are  not  ways  by  which  the 
Standard's  own  cost  of  production  has  been  decreased  and  greater 
industrial  efficiency  secured,  but  by  which  the  costs  of  competitors 
have  been  increased  and  the  supply  limited.  They  fall  into  three 
divisions. 

First,  there  is  the  monopoly  of  the  pipe-lines.  As  we  have 
seen,  these  require  large  investments  of  capital;  but  it  is  not 
this  alone  that  has  kept  competitors  out.  At  least  two  other  ele- 
ments figure  in  the  situation:  the  great  obstacles  which  have  been 
met  by  rival  lines  attempting  to  lay  their  pipes,  and  the  competi- 
tion they  meet  from  the  Standard,  once  they  have  been  laid. 
As  to  the  former,  when  an  independent  pipe-line  has  been  planned, 
persons  supposed  to  be  acting  for  the  Standard  Oil  Company  have 
bought  strips  of  land  across  its  proposed  route  in  the  attempt  to 
block  it,  litigation  has  been  encountered  to  an  extraordinary  degree, 
and  where,  as  in  New  Jersey,  there  is  no  law  granting  pipe-lines 
the  right  of  eminent  domain,  the  railroads  have  absolutely  refused 
to  permit  the  new  line  to  cross  their  right  of  way.  ^  Since  one 
cannot  go  far  without  encountering  a  railroad,  the  independent 
line  is  made  impossible  or  at  least  very  expensive.  Supposing, 
however,  a  rival  to  be  in  the  field,  the  Standard  will  raise  the 
price  of  crude  oil  by  the  payment  of  premiums  on  the  oil  bought 
under  competition.  If  the  premium  be  20  per  cent,  the  new  line 
must  pay  this  20  per  cent  on  all  the  oil  it  buys;  the  Standard, 
only  on  the  oil  it  buys  in  that  field,  say  5  per  cent  of  its  total  pur- 
chases. The  size  of  the  concern  reduces  the  average  of  the  in- 
creased cost  of  crude  oil.  ^     Because  of  the  capital  required,  the 

1.  Gunton's  Magazine,  Feb.  1903,  vol.  xxiv,  p.  164  ff. 

2.  Report   of  the  Industrial  Commission,    1900,   vol.   i,   pp.    650-5,    697. 

3.  Report  of  the  Industrial  Cotnmission,  1900,  vol.  i,  pp.  394-5.  S?^-?* 
The  fact  that  the  Standard  by  paying  premiums  in  competitive  fields  alone, 
can  buy  crude  oil  at  an  average  price  below  that  of  independent  firms,  is  of 
itself  a  monopoly  advantage,  which  increases  competitors'  costs,  apart  from 
control  of  the  pipe-lines. 


60       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

opposition  of  railroads  to  the  independents,  and  the  fear  of  com- 
petition in  the  purchase  of  crude,  there  are  but  few  independent 
Hnes;  the  Standard  Oil  Company  has  a  practical  monopoly  of  the 
pipe-lines.  This  is  of  considerable  advantage  to  it.  Since  the 
railroad  cannot  transport  oil  as  cheaply  as  the  pipe-line,  it  accepts 
the  rate  the  latter  makes.  The  Standard  Oil  Company  has  fixed 
the  charge  on  crude  oil  at  several  times  the  cost  of  pumping.  The 
rate  from  western  Pennsylvania  to  the  seaboard  has  been  52.1 
■cents  per  barrel,  when  it  seems  clear  that  ten  cents  would  yield  a 
reasonable  profit.  The  Standard,  of  course,  merely  pays  to  itself 
the  charges  on  its  own  oil;  and  the  transportation  costs  it  perhaps 
five  or  six  cents.  But  the  independent  must  pay  fifty-two  cents. 
What  is  the  result?  The  cost  of  production  of  competitors  is 
raised.  Rather  than  pay  the  high  rates  they  locate  their  refineries 
near  the  wells,  and  lose  the  benefit  of  the  favorable  situation 
possessed  by  the  Standard  refineries  near  the  market.  ^  The  ad- 
vantages of  long  distance  pipe-line  transportation  accrue  almost 
solely  to  the  Standard.  Ethically,  the  situation  has  two  aspects. 
From  one  point  of  view  the  Standard  has  the  right  to  charge 
what  it  pleases  for  the  use  of  pipe-lines  which  it  owns,  as  not  differ- 
ing from  the  usual  forms  of  property.  The  only  question  of  wrong 
then  is,  has  the  Standard  stood  in  the  way  of  independent  pipe- 
lines? If,  however,  we  regard  the  pipe-lines  as  common  carriers, 
such  rates  as  are  demanded,  which  are  not  only  unreasonably  high 
but  also  discriminating  in  that  they  build  up  the  refineries  of  the 
Standard  at  the  expense  of  others,  are  ^^er  se  not  justifiable. 

The  first  set  of  those  special  privileges  mentioned  above, 
which  the  Standard  has  obtained,  relates,  as  we  have  seen,  to  the 
purchase  of  crude  oil  at  the  wells  and  its  transportation  in  pipe- 
lines to  the  refineries;  the  second  is  involved  in  the  transporta- 
tion by  rail  of  the  finished  product  to  the  dealers.  Rebates  were 
forbidden  by  the  Interstate  Commerce  Act  of  1887;  but  discrim- 
inations may  take  other  forms.  We  have  seen  that  the  Stand- 
ard's refineries  are  located  at  different  points  from  the  others, 
that  as  a  result  of  the  pipe-line  charges  independents  cannot  build 
at  the  same  places  as  the  Standard.  Now,  from  the  Standard  Oil 
Company's  refineries,  the  rates  on  oil,  open  and  secret,  are  from 
one  quarter  to  one  and  one  quarter  cents  per  gallon  less  to  a  great 
part  of  the  United  States  than  from  competing  refining  centers, 


I.   Report   on  the   Transportation   oj  Petroleum,    1906,  pp.    56-62,    84-88. 
Report  of  the  Industrial  Commission,   1900,  vol.  i,   pp.  667,  594. 


IN  THIS  COUNTRY.— JOHN  D.  ROCKEFELLER.  61 

allowance  being  made  for  differences  in  distance.  This  is  the  con- 
clusion to  which  Mr.  Garfield  comes  in  his  report  to  President 
Roosevelt  on  the  Transportation  of  Petroleum  of  May  1906;^  and 
the  facts  given  bear  out  the  statement.  These  may  seem  small 
differences  in  rates;  but  when  we  remember  that  they  apply  to 
hundreds  of  millions  of  gallons,  and  that  one  half  cent  per  gallon 
will  pay  for  the  entire  cost  of  refining  oil  and  yield  a  handsome 
profit,  the  importance  is  realized  of  rate  discriminations  of  one 
quarter  cent  to  one  and  one  quarter  cents,  which  will  enable  the 
Standard  to  sell  oil  with  profit  at  a  price  yielding  nothing  to  pay 
the  costs  of  refining  to  its  competitors.  ^ 

Third,  in  the  sale  of  its  products  the  Standard  has  so  organized 
the  market  as  to  make  great  use  of  the  monopoly  position  which 
results  from  its  size.  As  in  buying  the  crude  oil  it  could  pay 
premiums  at  competitive  points,  while  buying  cheaper  elsewhere', 
so  as  vendor  of  the  finished  product,  it  can  keep  the  price  down 
where  rivals  are  in  the  field,  but  charge  more  at  non-competitive 
points.^  Since  to  the  independent  refiner  all  points  are  com- 
petitive points,  he  has  no  such  opportunity.  The  monopoly  posi- 
tion in  regard  to  the  consuming  public  is  very  apparent.  Oil  is  a 
cheap  commodity;  and  where  there  is  no  competition  the  price 
can  be  raised  considerably  without  greatly  reducing  the  sales. 
,f  Three  forms  of  special  privilege  which  the  Standard  has  se- 
*  cured  have  been  mentioned.  There  remains  a  factor  which  has 
reinforced  them  all.  The  mere  size  of  the  Standard  Oil  Company's 
bank  account  has  been  a  great  advantage  apart  from  any  other 


_  I.    Vide  pp.  2  and  21  especially. 

2.  Report  on  the  Transportation  oj  Petroleum,  1906,  pp.  33"34-  -^Iso 
the  statements  of  Mr.  Prouty  of  the  Interstate  Commerce  Commission. 
Annals  of  the  American  Academy,  vol.  xv,  pp.  46-9,  January,  1900. 

3.  There  is  considerable  evidence  that  the  Standard  has  very  generally 
charged  more  for  oil  where  there  is  no  competition. 

{a)  Mr.  Garfield  says:  "After  deducting  the  freight  rate,  the  price  of 
such  (ordinary  illuminating)  oil  is  usually  from  two  cents  to  five  cents  a 
gallon  higher  in  the  non-competitive  than  in  the  competitive  fields." — 
Report  on  the  Transportation  oj  Petroleiim,   1906,  pp.  xx,  xxi. 

.  (b)  Mr.  Monnett,  formerly  attorney-general  of  Ohio,  has  prepared  a 
table  of  prices  of  oil  in  towns  of  Michigan  and  Ohio  where  there  is  com- 
petition and  where  there  is  no  competition,  which  indicates  the  same  state 
of  affairs.  Report  of  the  Industrial  Commission,  1900,  vol.  i,  p.  317.  Vide 
pp.  277  and  568-70. 

(c)  Miss  Tarbell,  in  her  History  oj  the  Standard  Oil  Company,  gives 
further  evidence  in  Chap.  XVI,  on  The  Price  of  Oil,  especially  pp.  218-21 
(Vol.  II). 


^ 


62  ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

consideration.  It  would  deter  the  great  majority  from  ever  at- 
tempting active  competition;  it  would  insure  victory  in  a  price- 
cutting  contest  for  business  over  any  small  antagonist  no  matter 
how  industrially  efficient  the  latter  might  be.  In  the  great  war 
of  1877  with  the  powerful  competitor,  The  Empire  Transportation 
Company,  this  capital  strength  was  an  important  factor  in-g«tn- 

<«^Jl'V^1^4^,  iug-^^*^"*^^  ^^^  ^^^  Standard  Oil  Company. 

;     '  (d)     These   are  the  ways  in  which  the   Standard  has  been 

built  up,  in  which  the  "Trust  idea"  has  been  developed, — ways 

/  beneficial,  ways  detrimental  to  the  economic  interests  of  society. 

■  y'      ^...     Some  features,  however,  familiar  in  other  trusts,  are  to  be  remarked 

„\  bij«lheir  absence.     N  atural  resources  which  liave  been  the  "ba'siS" 

I    of  monopoly  and  profit  to  many  trusts  have  played  but  a  small 
part  in  the  Standard  Oil  Company.     In  fact,  until  1887.  it  bought 
-^    practically  no  oil  lands,  ^  and  from  1890  to  1898  produced  amounts 
^    of  crude  oil  varying  from  24  per  cent. .to  35  per  cent  of  the  total.  ^ 
■Several  reasons  a'fe"  given  for  this  refusaT  of  the  company  to  go 
into  the  purchase  of  oil  fields  on  an  exhaustive  scale.     It  seems 
"^  ^^hat  the  fields  are  very  extensive,  and  new  ones  are  constantly 

^.W^'      being  discovered.     It  would  make  it  very  expensive  to  purchase 
t  ^jhem  all  in  any  community  where  land  has  a  considerable  value 

^O^'      outside  of  its  oil  resources.^     Again,  the  oil  trust  is  not  protected 
by  a  tariff  shutting  out  foreign  competition.     Nor  has  the  Standard 

i  achieved  the  notoriety  of  fraudulent  promotion  or  speculative 
mismanagement  for  the  benefit  of  the  promoter  and  director  at 
the  expense  of  the  investor  and  stockholder.  In  this  connection 
Mr.   Rockefeller's  testimony  before  the  Industrial  Commission  is 

Jnteresting. 

"The  dangers  are  that  the  power  conferred  by  combination 
may  be  abused;  that  combinations  may  be  formed  for  speculation 
in  stocks  rather  than  for  conducting  business,  and  that  for  this 
purpose  prices  may  be  temporarily  raised  instead  of  being  lowered."* 
Aside  from  these  features,  then,  the  essential  elements  of  the 
trust  have  been  worked  out  by  Mr.  Rockefeller  and  his  associates. 

§  6.Ljn  the  seventies,  Mr.  Rockefeller  built  up  the  Standard 
Oil  Company  into  a  monopoly,  his  means  being  rebates,  effective 

1.  Ida  M.  Tarbell,  History  oj  the  Standard  Oil  Company,  1904,  vol.  ii, 
pp.  162-3. 

2.  Report  oj  the  Industrial  Commission,   1900,  vol.   i,  p.  561. 

3.  P.   de   Rousiers,   Les  Industries   MonopolisC'es  aux  Etats-Unis,    1898, 

PP-  25-7- 

4.  Report  of  the  Industrial  Commission,  1900,  vol.   i,  p.  797. 


i 


,       IN  THIS  COUNTRY.— JOHN  D.  ROCKEFELLER.  63 

.    organization,  and  a  general  desire  on  the  part  of  the  refiners  to 
\  do  away  with  competition.     Since  then  he  and  others  have  worked 
A}0ut  to  great  perfection  most  of  the  money-making  features,  de-  ; 
sirable  and  undesirable,  of  a  trust.  JWhen  one  sees  this  perfection, — 
"-"  wliereas  if  others  received  intermittent  rebates,  the  Standard  re- 
ceived them  steadily;  if  the  producers  to  check  competition  com- 
bined in  an  association  without  duration,  the  Standard's  associa- 
tion has  lasted ;  if  many  firms  to-day  are  more  or  less  favored  as 
a  result  of  discriminations  in  rates  between  localities,  the  Standard 
is  apparently  benefitting  by  a  whole  system  of  such  discriminations 
covering  most  of  the  country  ;/finally,  if  there  is  any  business  in 
.     the  United  States  which  is  noted  for  its  efficient  and  economical 
I     methods  in  the  handling  of  an  article  from  its  purchase  as  raw 
"'^material  to  its  sale  to  the  dealer,  it  is  the  Standard  Oil  Company, — 
when  one  sees  these  results  one  cannot  but  realize  that  very  great 
ability  is  at  the  basis  of  it  all.       The  fact   is  well   shown  in  the 
foreign  trade.  /    When  it  comes  to   exporting  oil  and  competing 
^with  the  Russian  products,  pipe-line  and  rail  discriminations  are 
out  of  the  question.     It  becomes  a  matter  of  efificiency  in  prod- 
uction and  sale.  ^     So  keen  is  the  competition  when  men  like  the 
Rothschilds  are  interested  in  the  Russian  oil  that  the  price  has  often 
to  be  reduced  to  cost,  leaving  for  profits  only  the  thorough  utiliza- 
tion of  by-products.  -     Yet  nearly  60  per  cent  of  its  refined  oil  the 
Standard  exports j^jt-meets  this  competition  and  secures  a  return.  ^ 
The  facts" Justify/ the  conclusion  that  Mr.   Rockefeller,  while  not 
■^'-     very  particular  as  to  all  of  his  methods,  is  possessed  of  remarkable 
'^.,.      business  ability,   and  that  the  great  bulk  of  his  fortune  is  to  be  ac- 
counted for  on  the  ground  of  what  are,  to  the  entrepreneur,  profits.  ■ 

J 


1.  Any  advantage  the  Standard  may  have  in  the  better  quality  of 
American  crude  oil  is  largely  annulled  by  its  higher  price.  Report  of  the 
Industrial  Commission,   1900,  vol.  i,  p.  791. 

2.  Ibid.,  pp.  566,  570. 

3.  It  is  scarcely  possible  to  believe,  as  is  sometimes  said,  that  the 
Standard  fails  to  profit  by  its  foreign  trade,  and  makes  up  for  its  losses 
abroad  by  raising  prices  at  home.  It  would  hardly  be  willing  for  the  sake 
of  future  markets,  always  competitive,  to  sell  .year  after  year,  over  half  its 
products  at  a  loss.  Nor  would  the  444,000,000  gallons  sold  for  domestic 
use  (1904)  at  an  average  net  profit  of  5  cents  per  gallon  yield  much  more 
than  half  enough  to  pay  the  dividend  declared.  There  must  be  large  returns 
on  this  competitive  foreign  trade. 


CHAPTER  IV. 

^tjs(tract=^ropert|>  anb  HavQt  Jf ortunes 

There  is  an  interesting  explanation  of  the  cause  of  large 
fortunes  suggested  in  an  essay  by  Professor  Jenks,  which  may  be 
discussed  by  itself  before  opening  up  the  problem  generally.  He 
says,  with  regard  to  the  accumulation  of  wealth: 

"Of  course,  we  must  recognize  the  fact  that  the  form  of  hold- 
ing property  in  the  shape  of  stocks  and  bonds,  and  the  ability 
thus  to  possess  great  wealth,  to  use  it  and  to  secure  the  income 
from  it  without  active  participation  in  the  management  of  a  busi- 
ness, is  a  modern  condition  which  has  made  possible  many  of  the 
striking  phenomena  of  the  later  days.  Mr.  George  P.  Watkins  in 
an  able  essay,  as  yet  unpublished,  has  rightly  emphasized  this 
economic  and  legal  condition  which  no  one  can  afford  to  overlook, — 
a  condition  without  which  our  modern  methods  of  v/ealth-building 
and  fortune-using  would  be  impossible.  This  fact  is,  of  course, 
assumed  and  understood  throughout  the  entire  discussion."^ 

President  Eliot  mentions  a  like  economic  development,  though 
referring  to  it  as  affecting  the  social  responsibility  of  the  man  of 
wealth  rather  than  as  a  cause  of  his  wealth. 

"Since  the  Civil  War  a  new  kind  of  rich  man  has  come  into 
existence  in  the  United  States.  He  is  very  much  richer  than  any- 
body ever  was  before,  and  his  riches  are,  in  the  main,  of  a  new 
kind.  They  are  not  great  areas  of  land,  or  numerous  palaces,  or 
flocks  and  herds,  or  thousands  of  slaves  or  masses  of  chattels. 
They  are  in  part  city  rents,  but  chiefly  stocks  and  bonds  of  cor- 
porations, and  bonds  of  states,  counties,  cities  and  towns.  These 
riches  carry  with  them  of  necessity  no  visible  or  tangible  responsi- 
bility, and  bring  upon  their  possessor  no  public  or  semi-public 
functions."^ 

Mr.  Watkins,  in  the  essay  mentioned,  applies  to  stocks  and 
bonds  and  other  instruments,  whereby  paper  ownership   is  sub- 

1.  J.  W.  Jenks,  Great  Fortunes,  1906,  p.  14. 

The  essay  by  Mr.  Watkins  has  since  been  published.  G.  P.  Watkins, 
The  Growth  of  Large  Fortunes,  Publications  of  the  American  Economic 
Association,  Third  Series,  vol.  viii.  No.  4,  November,   1907. 

2.  Charles  W.  Eliot,  Great  Riches,  1906,  p.  i. 


f    ^      of  The  y. 

UNIVERSITY    }* 

Of 

IN  THIS  COUNTRY.        —*=«=--- --^^  65 

stituted  for  the  direct  ownership  of  the  concrete  means  of  produc- 
tion, the  name  of  "abstract -property."  Whether  this  "abstract- 
property"  is,  or  is  not  a  fundamental  cause  of  large  fortunes,  it 
is  certain  that  its  development  has  been  coincident  with  their 
accumulation.  The  nineteenth  century,  and  especially  the  latter 
part,  has  seen  a  great  increase  in  stocks  and  bonds.  Concerns  of 
all  sizes  and  in  all  lines  of  business  have  been  capitalized;  and 
municipal  and  state  debts  have  greatly  increased.  The  growth  in 
economic  thought  during  the  century  of  the  distinction  between 
profits  and  interest, — between  the  return  to  the  entrepreneur 
personally,  and  the  return  on  the  capital  invested, — only  reflects 
the  corresponding  divorce  of  management  and  ownership  of  prop- 
erty. This  form  of  property,  indeed,  existed  to  a  small  extent 
in  the  Middle  Ages;  but  the  Industrial  Revolution  has  been  the 
occasion  for  its  great  growth.  Concrete  capital  has  been  called 
for  in  ever-increasing  quantities  to  assist  in  production,  so  that  the 
members  of  firms  have  not  been  able  to  meet  the  demand.  Ab- 
stract-property (stocks  and  bonds)  has  been  selected  as  an  excellent 
means  for  securing  the  necessary  funds  from  the  general  field  of 
the  investing  public,  and  turning  them  to  a  specific  use.  The  firm, 
when  required  to  enlarge  its  capital  in  order  to  keep  up  with  the 
progress  in  industrial  methods,  is  incorporated,  and  securities  are 
issued,  forms  of  abstract-property.  It  sells  these  in  the  open 
market  for  the  cash  needed  for  enlargement.  The  convenience  of 
the  securities  and  their  legal  sanction  as  claims  upon  the  property 
make  them  salable,  often  throughout  the  entire  country.  Thus 
the  development  of  abstract -property  or  capital  has  greatly  facili- 
tated industrial  expansion  and  the  general  increase  of  wealth,  and 
is  a^well^nighjndispen sable  factor  in  the  modern  production  process^ 
This  increase  of  stocks  and  bonds  could  operate  as  a  causeof 
large  fortunes  in  three  ways,  and  no  doubt  has  done  so:  first,  by 
virtue  of  the  convenience  of  these  instruments  as  a  form  of  hold- 
ing property;  second,  because  of  the  new  demand  thus  arising  for 
speculative  enterprise  in  handling  these  securities;  third,  as  pre- 
senting greater  opportunity  for  fraud  in  the  promotion  and  man- 
agement of  companies  whose  stock  is  widely  held,  than  is  possible - 
in  the  closer  connection  of  the  firm. 

It  is  to  the  first  of  these  possibilities  that  Mr.  Watkins  would 
,seem  chiefly  to  refer.     A  fortune  of  modern  size  could  not  exist 
if  it  were  not  that  some  convenient  form  of  wealth  has  been  in- 
vented which  reduces  the  responsibility  and  work  connected  with 
the  ownership  of  property.     Mr.  Carnegie  has  $200,000,000  of  the 

E 


i» 


4 


66       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

United  States  Steel  Company's  bonds  safely  deposited  and  leaving 
him  free  from  any  onerous  incidents  of  ownership.  Such  a  situa- 
tion could  not  well  exist  without  the  presence  of  bonds.  And  it 
is  probably  true  that  wealth  in  the  modern  form  of  securities  is 
more  easily  cared  for  than  in  its  concrete  form. 

But  this  is  quite  different  from  saying  that  in  the  absence 
of  abstract-property  the  responsibility  increases  pro  rata  with  the 
increase  of  wealth  or  that  the  labor  involved  in  managing  an 
estate  would  prove  to  be  an  effective  check  upon  accumulation  in 
the  majority  of  cases.  Certainly  the  three  fortunes  studied,  w^hich 
are  among  the  largest  in  the  country,  would  not  go  to  prove  such 
a  proposition.  Mr.  Hill  and  Mr.  Rockefeller,  for  a  good  portion 
of  the  time,  have  managed  concrete  property  much  greater  in 
value  than  their  individual  fortunes;  and  though  their  wealth  has 
been  largely  in  the  form  of  securities,  this  would  seem  to  be  a 
matter  of  convenience  rather  than  of  necessity  in  handling  great 
wealth.  The  Astor  fortune  points  even  more  strongly  in  the  same 
direction.  Though  the  estate  is  for  the  greater  part  composed  of 
concrete  property,  land  and  buildings,  yet  for  over  three  genera- 
tions it  has  steadily  grown  and  the  work  of  building,  repairing, 
collecting  rent,  etc.,  has  been  done  without  the  burden  of  "manage- 
ment" checking  its  growth  or  leading  to  a  cessation  of  the  purchase 
of  real  estate.  ^ 

It  would  seem  that  the  emphasis  laid  on  abstract-property 
overlooks  other  ways  in  which  estates  may  be  run  without  making 
undue  demands  on  the  owner.  He  may  delegate  his  work  to 
stewards,  as  formerly,  or  to  managers  and  employees  today,  leav- 
ing him  free  from  the  bulk  of  the  labor  of  supervision.  There  is 
also  the  further  alternative  of  a  trust.  This  is  a  form  of  holding 
early  developed,  which  as  well  as  incorporation  frees  the  real  owner 
from  responsibility. 

There  is,  however,  a  modern  development  which  has  raised  con- 
siderably the  maximum  limit  of  large  fortunes  and  which  may  as 
well  be  spoken  of  here  as  anywhere.  It  is  the  growth  of  the  domi- 
nance of  law  and  order  nationally  and  internationally  and  the  rec- 
oraition  o£p£QP.g.rtX  fi?  \\]^^^^^'^<^  "^  There  is  an  investigation  of 
FrencTrfortunes  for  the  last  seven  centuries,  which  furnishes  some 
excellent   illustrations  of  the   change.  ^    The   men    of  wealth,   in 

1.  Supra,  pp.  17-20. 

2.  G.  d'Avenel,  Les  Riches  depuis  sept  cent  Ans,  Revue  des  Deux  Mondes, 
5th  period,  vol.  xxxi,  pp.  861-86,  vol.  xxxii,  pp.  279-309,  Feb.  15  and  March 
15,  1906. 


IN  THIS  COUNTRY.  67 

former  times,  were  many  of  them  executed  and  their  estates  con- 
fiscated. The  case  of  Jacques  Coeur  is  an  interesting  one.  He 
was  the  owner  of  thirty  manors,  of  lead  and  copper  mines,  of  a 
paper  mill,  and  of  a  number  of  ships  engaged  in  trade.  He  was 
an  enterprising  merchant,  worth  perhaps  27,000,000  francs,  the 
wealthiest  man  of  his  class  in  the  Middle  Ages.  In  1449  he  loaned 
9,000,000  francs  to  the  King;  and  in  1453  the  rest  of  his  property 
was  confiscated.  ^  Richelieu,  on  the  contrary,  who  from  his  posi- 
tion was  safe,  accumulated  a  much  larger  fortune  and  retained  it.  ^ 
If  income  and  inheritance  taxes  today  should  be  imposed  in  an 
extreme  progressive  form,  it  would  have  a  like  effect  of  setting  a 
maximum  limit  on  fortunes. 

The  development  of  abstract-property,  to  state  briefly  the 
second  of  the  three  ways  in  which  it  has  caused  large  fortunes, 
has  contributed  complexity  as  well  as  convenience  to  modern  busi- 
ness. The  new  relation  of  industry  to  the  investing  public,  the 
demand  for  and  supply  of  ready  capital  has  called  for  the  services 
of  a  class  of  adjusters, — the  speculators,  and  promoters  in  certain 
of  their  activities, — who  use  their  money  and  credit  as  a  reserve 
fund  to  keep  this  demand  and  supply  in  as  normal  a  condition  as 
possible.  These  men  may  truly  be  said  to  owe  their  wealth  to  the 
development  of  abstract-property.  And  it  is  an  employment  pro- 
ductive of  large  returns.  To  anticipate  popular  demand  for  securi- 
ties, to  advance  the  capital  and  have  the  paper  on  hand  for  public 
sale  when  the  demand  for  it  comes,  to  forestall  the  prosperity  of 
one  industry,  the  failure  of  another, — this  involves  great  move- 
ments and  large  masses  of  capital;  and  the  reward  of  sound  judg- 
ment is  correspondingly  great. 

But  the  complexities  of  abstract-property  have  furnished  the 
opportunity  for  fortunes  different  from  the  just  returns  on  specu- 
lation. The  public  has  not  been  educated  morally  or  intellectually 
in  the  "abstract"  afe  rapidly  as  property  has  taken  that  form; 
laws  have  not  kept  pace  with  the  change ;  and,  as  a  result,  fraud  and 
swindling  have  been  practised  on  a  scale  and  with  a  boldness  other- 
wise impossible.  The  irresponsible  director,  the  fraudulent  pro- 
moter, find  in  abstract-property  their  tools.  The  phenomena  are 
familiar  to  every  reader. 

There  is  a  fourth  and  indirect  way  in  which  abstract-property 
promotes  large  fortunes,  by  facilitating  production  and  especially 
by  increasing  the  size  of  the  industrial  unit,  the  corporation,  and 

1.  Ibid:,  vol.  xxxi,  pp.  871-2. 

2.  Ibid.,  vol.  xxxi,  pp.  869-70. 


68       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

so  enlarging  the  "captain  of  industry's"  field  of  operation  and  his 
gains;  but  this  must  be  left  to  the  next  chapter.  It  resembles 
the  effect  of  increased  transportation  facilities  on  a  manufacturing 
plant,  and  is  one  of  many  such  modern  developments.  It  does 
not,  however,  seem  to  be  referred  to  in  the  quotation  with  which 
this  chapter  commences. 

Taking  together,  however,  the  three  ways  that  have  been  men- 
tioned in  which  fortunes  are  directly  influenced  by  abstract-prop- 
erty, it  still  seems  that  its  development  is  secondary  among  the 
environmental  changes  which  make  the  present  the  age  of  great 
fortunes.  The  second  and  third  ways  only  apply  to  a  limited  class 
of  fortunes;  the  first,  though  of  general  application,  would  seem 
*not  to  be  really  fundamental.  A  more  important  change  is  the 
growth  of  the  great  industrial  processes  with  the  accompanying  de- 
mand for  captains  of  industry  and  for  capital.  The  enormous  pro- 
duction of  wealth  and  the  centralized  form  of  industry  offer  op- 
portunities for  Titanic  feats  in  improved  management  and  in- 
creased output.     But  this  is  a  matter  for  the  next  chapter. 


CHAPTER  V. 

®i)e  economic  Causes  of 
%avQt  Jfortunes 

§  I.  When  it  comes  to  discussing  the  theory  of  the  problem  of 
large  fortunes  it  is  not  easy  to  decide  from  what  standpoint  it  is 
to  be  most  effectively  attacked.  We  may  begin,  however,  with  a 
simple  question.  In  looking  back  over  the  three  fortunes  dis- 
cussed, and  the/process  of  accumulation,  what  appears  to  be  the 
most  general  and  important  element  ?  Is  it  the  presence  of  a  pro- 
tective tariff,  the  exploitation  of  a  new  country,  monopoly  or  the 
gradual  accumulation  by  saving  and  re-investing  the  interest  re- 
JP  turn  ?  May  we  not  generalize  and  say  that  the  most  characteristic 
J  feature  is  the  position  of  the  men  themselves  as  leaders  in  large 
J?^ enterprises,  as  captains  of  industry:  Astor,  the  fur  trader;  Hill, 
the  railroad  builder;  Rockefeller,  manufacturer  and  dealer  in  oil? 
And  the  same  probably  is  true  of  the  majority  of  modem  fortunes. 
But  what  have  been  the  conditions  in  more  recent  times,  which 
have  produced  the  phenomena  of  single  men  controlling  such 
large  undertakings?  To  answer  this  question  we  must  sketch 
briefly  _the  history  of  the  development  of  the  entrepreneur, — his 
evolution. 

Men  have  been  engaged  in  business  from  time  immemorial,  and 
they  have  been  engaged  for  a  profit.  In  the  Middle  Ages  it  appears 
that  the  men  of  w^ealth  were  not  the  business  men,  however,  but 
the  titled  nobility,  the  owners  of  the  land.  Yet  k  is  from  the 
master  workman,  rather  than  from  the  landlord,  that  a  modern 
captain  of  industry  will  trace  his  economic  descent.  The  field 
occupied  by  such  an  artisan  was  very  limited ;  nor  could  he  enlarge 
it.  He  worked  in  a  small  shop  with  a  few  apprentices  whom  he 
supervised.  The  modes  of  manufacture  were  stereotyped,  the 
product  small  and  the  market  small.  The  guild  rules  were  strict 
and  regulated  manufacture  minutely.  The  number  of  apprentices 
was  limited;  and  they  occupied  in  their  turn  their  masters'  place. 

This  handicraft  system  of  manufacture  and  the  corresponding 
smallness  of  the  individual  product  continued  long  after  the  market 


70       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

had  been  enlarged.  Indeed  it  was  commerce  and  banking  rather 
than  manufacture  which  first  offered  the  opportunity  for  the  de- 
velopment of  large  business;  and  during  the  seventeenth  and 
eighteenth  centuries  we  have  wealthy  merchants  and  financiers  at 
the  head  of  enterprises  of  large  size  whose  fortunes  begin  to  assume 
a  place  alongside  the  inherited  estates  of  the  nobility.  There 
were  the  bankers  of  Northern  Italy,  the  Fuggers  in  Germany,  the 
Bank  of  Amsterdam,  and  the  Bank  of  England.  In  commerce 
there  were  such  organizations  at  the  East  India  Company  and  the 
Hudson  Bay  Company,  formed  during  these  centuries  when  trade 
with  the  Orient  and  with  America  was  developing.  There  were  at 
the  time  also  some  rich  men  in  France  who  acquired  their  wealth 
as  tax  collectors.  ^  But  this  was  a  matter  of  royal  favor  and  of 
government  administration  rather  aside  from  the  true  development 
of  business. 

What  led  to  the  organization  of  commerce  and  banking  in  a 
few  hands?  It  would  seem  to  be  the  same  causes  that  favor  large 
scale  production  to-day.  Foreign  trade  demanded  numerous  posts 
established  abroad,  a  fleet  of  ships  and  men  specially  informed  as 
to  conditions  in  different  countries.  The  equipment  had  to  be 
large,  and  the  whole  well  organized.  This  offered  the  opportunity 
for  individuals  or  groups  to  develop  large  and  renumerative  busi- 
nesses with  which  smaller  outlays  could  not  compete;  it  put  a 
premium  on  individual  initiative  and  ability.  It  made  the 
"merchant  prince."  To  inquire  what  led  to  the  development  of 
commerce  in  its  turn,  is  a  question  too  far  afield, — the  use  of  the 
compass,  the  geographical  discoveries,  etc.,  were  fundamental 
causes. 

Banking  developed  into  large  units  for  similar  reasons.  Here, 
also,  foreign  correspondents  were  required,  and  there  was  the  need 
of  funds  of  considerable  amount.  Especially  was  this  true  of  those 
who  dealt  with  the  governments  and  made  them  loans.  It  was 
a  big  business  and  required  a  large  house. 

Astor  in  his  capacity  as  trader  was  a  product  of  this  second 
period.  His  capital  was  invested  in  wooden  sailing  vessels  and 
not  in  railways  or  factories.  Indeed,  Astor's  trade  must  have 

been  well-nigh  as  large  and  highly  organized  as  was  ever  the  case 
with  an  individual  under  the  old  regime.  He  was  engaged  largely 
in  two  of  the  most  important  trades  of  the  day.  The  fur  trade, 
which  an  unexplored  and  undeveloped  continent  offered,  he  de- 

I.  Revue  des  Deux  Mondes,  5th  period,  vol.  xxxi,  pp.  864,  S71. 
Vide  supra,  p.  66,  note  2. 


IN  THIS  COUNTRY.  71 

veloped  to  the  greatest  possible  degree,  stopped  only  by  the  Astoria 
failure.  He  entered  the  China  trade  also.  Nevertheless,  he  is 
said  to  have  made  only  $2,000,000  in  this  manner,  which  in  com- 
parison with  modem  profits  shows  clearly  the  comparative  small- 
ness  of  "big  business"  in  1800.  In  this  same  fortune  towards  the 
end  of  the  century  the  superior  management  of  one  branch  of  the 
family  was  largely  responsible  for  $70,000,000  increase  over  the 
wealth  of  the  other  branch.  ^  Yet,  Astor  had  as  much  ability  as 
his  descendants. 

The  obstacles  Astor  encountered  have  considerable  significance 
in  themselves  as  showing  what  limited  the  field  then  open  to  a 
trader.  It  will  be  remembered  that  Astor' s  first  wealth  came  after 
"the  surrender  of  the  (Canadian)  frontiers."  ^  State  prohibition  of, 
or  interference  with  trade  was  common  enough.  One  need  only  re- 
call the  Mercantile  System  and  the  many  restrictions  and  regula- 
tions of  trade  customarily  imposed  by  the  different  states  in 
those  days,  to  realize  that  there  were  plAity  of  barriers  to  big  under- 
takings. The  Astoria  enterprise  illustrates  another  limitation,  the 
faulty  communication  of  the  day  and  the  risk  of  total  loss,  so  that 
it  was  exceedingly  difificult  to  securely  organize  and  control  trade 
over  great  distances  from  a  single  center.^  As  a  result,  the  limits 
of  possible'extension  were  sooner  reached  than  today.  The  loss 
of  Astoria  was  a  result  of  the  uncertainty  of  communication  and 
the  risk  connected  with  trading  across  the  United  States.  The 
world-wide  trade  of  the  Standard  Oil  Company  affords  a  good  con- 
trast. 

The  nineteenth  century  has  brought  about  a  change.  Where 
foreign  trade  and  finance  were  almost  the  only  pursuits  organized 
on  a  large  scale,  this  is  the  case  today  in  many  industries;  and 
they  are  organized  on  a  larger  scale  than  ever  trade  and  finance 
were.  The  conditions  making  this  possible  have  also  made  it 
possible  for  individuals  to  carve  out  business  careers  for  them- 
selves of  great  magnitude,  and  have  produced  the  "captain  of  in- 
dustry." 

What  has  been  the  history  of  the  change  ?  With  the  invention 
of  the  steam  engine  and  power  machinery  it  was  demonstrated  that 


1.  The  reputed  wealth  of  the  family  is  given  in  the  table  in  Chapter  i 
(p.  20).  This  gives  to  the  older  branch  $.35,000,000  in  1875,  and  $200,000,000 
in  1905,  to  the  yotinger  branch  $20,000,000  in  1875,  and  $75,000,000  in  1905. 
The  increase  in  the  former  case  has  been  much  more  rapid. 

2.  Supra,  p.  13. 

3.  Supra,  p.  13. 


72       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

this  new  means  of  manufacture,  by  which  the  product  was  auto- 

\     matically  turned  out  in  large  quantities,  was  incomparably  more 

'     efficient  than  handicraft;  and  the  fall  of  this  system  took  place. 

But  the  machinery  to  be  used  economically  had  to  be  grouped  in 

I'/'bulk  about  a  power  plant,  and  gave  rise  to  the  factories,  much 

jy     larger    industrial    units    than    had    previously    existed.     Foreign 

commerce  was  already  developed  to  an  extent  to  furnish  the  markets 

required  by  the  new  mills;  and  England  manufactured  for  a  very 

considerable  part  of  the  globe  during  the  Napoleonic  wars.     As  a 

result,  a  new  class  of  wealthy  factory  owners  appeared  in  England. 

In  the  United  States  the  development  was  similar,  though  some- 
what later  in  date.  Factories  appeared  in  New  England;  railroads 
and  telegraphs  were  built  throughout  the  country ;  and  considerable 
fortunes  were  made  by  the  owners  of  these  latest  and  most  efficient 
means  of  manufacture  and  transportation.  Especially  was  this 
true  during  the  Civil  War,  when  the  government's  demand  for 
commodities  raised  prices  and  the  large  mill  owners  made  great 
profits. 

It  was  not,  however,  till  after  the  war  that  the  recent  de- 
velopment seems  to  have  attained  importance,  and  the  railroads 
generally,  by  combination  or  construction,  to  have  taken  the  foiTa 
of  great   systeias;   or  the   industrial   combinations  to   have   been 

Qiaanj^l^d^  Indeed  it  was  not  until  after  the  crisis  of  1873  that  the 

_  \ ^  concentration  of  industrial  control  began  in  earnest.  Just^why  the 
movement  should  have  been  so  long  delayed  is  not  clear.  Combi- 
nation of  existing  roads  doubtless  could  have  taken  place  before  that 
time  and  have  resulted  in  considerable  economies.  But  this  may 
not  have  been  known  to  the  owners;  and  of  course  there  was  the 
further  obstacle  in  the  unwillingness  of  the  separate  organizations 
to  surrender  their  identity,  much  like  the  unwillingness  of  states 
to  unite.  Further,  it  required  men  of  considerable  breadth  of  view 
and  administrative  power  to  put  through  the  change.  It  may  be 
that  the  Civil  War,  both  as  a  school  for  discipline  and  organization 
and  as  an  object  lesson  of  the  need  of  combined  effort  for  military 
success,  overcame  the  psychological  difficulties  in  the  way ;  it  may 
have  been  the  cumulative  effect,  as  the  advantages  of  larger  units 
became  constantly  more  and  more  obvious;  at  any  I'ate  the  process 
of  combination  finally  set  in.     The  organization  of  the  industrial 

r trusts  followed  the  formation  of  the  railway  systems.  The  entire 
development,  of  course,  is  based  primarily  upon  the  greater  effi- 
ciencv  of  the  large  unit,  whether  in  transportation  or  manufactur- 


IN  THIS  COUNTRY.  73 

ing.     And  with  the  larger  unit  have  gone  fortunes  larger  in  pro- 
portion, the  fortunes  of  the  captains  of  industry  of  today. 

The  nature  of  this  economic  development  as  a  necessary  pre- 
requisite to  the  acquisition  of  great  wealth  is  seen  in  fortunes 
like   those   of   Hill   and   Rockefeller.     The   growth   of  the   Great 
Northern  system  has  been  that  of  a  modern  corporation.     From    ; 
practically  nothing  in  1878  it  had  grown  by  1903,  a  twenty-five    1 
year  period,  to  have  5,500  miles  of  track  and  a  capitalization  of 
over  two  hundred  millions.  ^     Cheap  iron  and  steel,  the  invention 
of  the  locomotive  and  the  telegraph,  are  a  few  of  the  facts  which 
made  possible  the  building  of  this  road.     Once  these  tools  were 
available,  the  iron-way,  expensive  to  build  and  complicated  to  run, 
could  yet  carry  goods  with  a  speed  and  at  a  price  which  the  high- 
way or  the  waterway  afforded  by  the  Red  River  could  not  rival. ,  \ 
And  the  iron-way  required  a  captain  of  industry  to  organize  and  j 
manage  it.     It  is  this  radical  change  in  methods  of  doing  business  | 
which  accounts  most  largely  for  modern  large  fortunes.  ^ 

There  has  been  another  development  favorable  to  centraliza- 
tion in  industry  and  to  the  growth  of  one-man  power.  Formerly 
the  merchant  was  compelled  to  rely  for  the  extension  of  his  business 
on  his  own  resources  or  what  he  could  borrow  from  private  capi- 
talists of  immediate  acquaintance  or  obtain  by  discount  from  the 
bank.  To-day  he  may  incorporate  the  business,  issue  bonds  and 
shares  of  stock,  and  by  their  sale  obtain  funds  held  by  individuals 
for  investment,  which  could  not  have  been  secured  for  the  enter- 
prise by  the  old  methods.  The  sources  of  supply  of  capital  avail- 
able for  enterprises  which  the  rise  of  the  corportaion  as  a  form  of 
business  and  the  growth  of  a  wide  investing  public  have  opened 
up,  are  much  greater  to-day  than  formerly.  The  captain  of  in-  1 
dustry  now  does  not  wait  for  his  own  capital  to  grow  that  he  may  [ 
enter  the  large  field  open  to  him;  but  he  draws  on  the  available  J  "^ 
resources  of  several  countries  for  that  purpose.  The  Manitoba  ^  ■* 
road  was  built  with  borrowed  funds.  ^  This,  of  course,  is  of  great 
importance  in  bringing  men  to  sudden  and  great  wealth.  As  a 
result,  in  the  case  of  the  Manitoba,  the  four  promoters  who  held 
the  stock  in  a  few  years  made  several  millions  apiece  out  of  $250,000 
invested.^  The  process  would  have  been  much  slower  if  they  had 
had  to  rely  upon  their  own  funds,  though  in  the  end  the  same 
railroad  might  h^ve  been  built. 

1.  Supra,  p.  24,  Table,  p.  41,  and  p.  43.  ' 

2.  Supra,  p.  28. 

3.  Supra,  pp.  30-1. 


74       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

This  is  one  side  of  the  captain  of  industry — the  side  of  en- 
vironment. It  is  the  more  important  side,  however,  from  the 
point  of  view  of  accounting  for  their  large  fortunes,  since  what 
follows,  applies  doubtless  to  the  men  of  any  age.  How,  then,  about 
the  man  himself  and  his  methods?  Competition  tends  to  reduce 
profits  to  a  level.  Though  there  be  a  large  unit,  why  should  there 
not  still  be  such  competition  among  "captains  of  industry"  as  ot 
lead  their  returns  to  be  reduced  to  a  comparatively  small  figure? 

One  answer  is  afforded  by  a  comparison  of  the  Northern  Pacific 
and  Great  Northern  roads.  The  latter,  economically  run,  and  its 
traffic  carefully  cultivated  was  able  to  maintain  dividends  dur- 
ing the  crisis  of  '93,  while  the  other  went  into  the  hands  of  a  re- 
ceiver.^ The  discussion  of  Mr.  Hill's  management  will  be  recalled. 
Men  dififer  in  ability;  and  when  the  different  abilities  are  applied 
to  running  businesses  whose  capital  is  a  hundred  millions  or  more, 
the  difference  in  results  will  appear  in  a  very  considerable  total. 

What  were  the  features  which  were  most  notable  in  Mr.  Hill's 
management?  Good  judgment  in  building  the  lines  both  as  to 
location  and  tjaae ;  ^  the  development  of  new  traffic ;  ^  increasing  the 
_ efficiency  of  t^Broad  and  its  train-load;*  establishing  an  independ- 
ence of  conneomng  lines.  ^  It  is  to  be  noted  that  these  are  chiefly 
matters  of  initi^organization  of  the  plant  and  creation  of  markets. 
It  is  pretty  cleaMmow  that  such  are  the  more  important  and  re- 
munerative features  of  the  entrepreneur's  work  because  the  ability 
,js  rarer.  The  securing  of  men  to  administer  or  manage  an  estab- 
lished business  or  even  to  set  up  a  new  one  on  old  lines  is  not  so 
difficult  a  matter.  Public  office,  for  instance,  is  well  known  to 
broaden  those  who  take  it,  so  that  often  those  who  appear  most 
unfit  as  candidates,  if  elected,  do  fairly  well.  They  fall  into  the 
routine  and  tradition  and  are  carried  along.  In  management  there 
is  competition  even  between  men  of  the  best  type ;  and  their  re- 
turns are  reduced.  It  is  seen  in  the  fact  that  men  may  be  secured 
to  manage  a  large  corporation  like  the  Steel  Trust  for  $100,000  per 
year,  that  $75,000  is  a  high  salary  for  a  railroad  president,  and  that 
$100,000  was  regarded  as  a  dishonest  return  for  directing  a  $400,000- 
000  insurance  company.  But  the  careers  of  Mr.  Astor  and  Mr. 
Hill  have  been  different.     They  have  stood  out  as  landmarks  in 

1.  Siipra,  p.  39. 

2.  Supra,  pp  32,  34  and  43;  cf.  pp.  44-5. 

3.  Supra,  pp.  38-9  and  45. 

4.  Supra,  p.  43,  and  Tables,  pp.  41-2. 

5.  Supra,  pp.  35  and  40  (esp.  note  2  ) 


IN  THIS  COUNTRY.  75 

the  economic  history  of  the  country  and  have  possessed  in  a  rare 
degree  constructive  imagination, — witness  the  Astoria  enterprise;* 
witness  the  pioneer  work  of  Mr.  Hill  in  creating  trafific  and  reducing 
operating  expenses,^ — a  quality  which  is  not  capable  of  general 
cultivation  by  education  or  experience.  The  breaking  through  of 
new  paths  for  industry  is  a  difhcult  matter  to  accomplish  success- 
fully, and  being  of  great  importance  to  society,  is  the  source  of 
large  rewards. 

Sometimes  it  is  not  the  person  who  does  the  pioneer  work  who 
reaps  the  rewards,  but  the  one  who  comes  just  after,  a  result  due 
to  poor  judgment  as  to  some  matter  of  temporary  but  vital  im- 
portance, or  to  unfavorable  fortune.  But  if  the  pioneer  does  make 
a  success  of  his  venture  he  often  secures  the  large  gains  to  which 
he  is  entitled.  This  is  well  shown  in  Mr.  Hill's  case.  The  Manitoba 
was  a  new  road ;  and  for  a  number  of  years,  as  a  result  of  venturing, 
it  was  without  competitors.  Its  profits  during  this  period  of 
prosperity  were  enormous ;  and  millions  were  returned  to  those  who 
secured  the  stock  for  a  few  hundred  thousand.  ^ 

It  is  important  to  note  that  these  returns  to  organizing  ability 
take  the  form  of  a  monopoly  return  on  the  capital  invested.  The^^ 
situation  creates  a  justifiable  form  of  monopoly  profits,  of  which 
we  shall  see  there  are  several  when  we  come  to  that  subject ;  but 
it  also  raises  the  question  as  to  how  far  these  large  profits  of  new 
enterprises  are  justifiable,  especially  in  cases  where  the  monopoly 
is  considerable.  It  is  clear  that  the  leader  should  have  more  than 
those  who  follow.  It  is  clear  that  there  should  be  a  return  to 
successful  enterprise  large  enough  to  induce  enough  men  to  engage 
in  "frontier"  work  to  build  up  the  country  at  the  proper  rate. 
The  real  need  or  demand  of  the  country  for  captains  of  industry 
should  find  concrete  expression  in  rewards  coming  to  them.  It 
would  seem,  on  the  whole,  that  the  return  has  been  adequate  in 
this  country.  But  this  is  not  to  say  that  there  should  be  a  reward 
to  the  successful  sufficient  to  make  up  for  the  losses  of  all  those 
who  may  wish  to  start  new  businesses.  Indeed,  an  abnormal 
number  of  failures  would  seem  to  indicate  an  unduly  high  return 
to  the  successful.  It  is  poor  economy  to  set  the  rewards  of  suc- 
cessful enterprise  so  high  that  men  are  tempted  to  go  ahead  in 
spite  of  great  risks  and  build  up  the  country  prematurely.  It  , 
is  poor  economy  for  the  prizes  to  be  so  large  that  more  competi- 

1.  Supra,  pp.  13-4. 

2.  Supra,  pp.  43-5. 

3.  Supra,  pp.  29-31. 


76       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

tors  enter  the  contest  than  the  number  for  which  there  is  any- 
real  need.  It  is  a  matter  of  opinion  as  to  whether  or  not  such 
has  been  the  case  in  this  country;  but  the  feverish  activity  of 
times  of  expansion,  the  unchecked  extension  of  railroads  based  on 
large  land  grants,  and  the  great  number  of  failures  in  times  of  crisis, 
especially  on  the  frontier,  would  indicate  that  "profits  of  enter- 
prise" have  been  too  high. 

What  are  the  other  causes,  besides  differences  in  ability, 
whereby  competition  has  not  reduced  profits  to  a  lower  level, — 
the  profits  be  it  remembered  of  the  larger  unit  of  today?  They 
may  be  grouped  under  the  head  of  monopoly.  In  the  halcyon 
days  before  government  interference,  a  railroad  had  power  to  fix 
its  rates  according  to  what  the  traffic  would  bear  without  much 
fear  of  any  immediate  competition.  The  oil  trust  has  been  able  to 
keep  competitors  out  of  the  field;  and  it  has  earned  $500,000,000 
more  or  less,  since  its  formation.  How  much  of  this  would  have 
been  earned  anyway  as  a  result  of  good  management,  and  as  com- 
petitive profits;  how  much  is  monopoly  profits? 

Monopoly  is  an  old  story.  The  guilds  in  the  Middle  Ages 
maintained  strict  monopolies  by  fixing  the  price  and  limiting  the 
number  of  apprentices.  Later  there  were  the  grants  of  the  crown, 
monopolies  of  trade  and  manufacture.  Today  we  still  have  mo- 
nopolies dependent  on  government  act, — "protective"  tariffs, 
patents  and  franchises. 

Apart  from  monopoly  elements  of  governmental  origin,  how- 
ever, we  have  to-day  others  of  more  recent  growth  which  bulk  much 
larger  than  the  old  forms,  and  appear  in  the  railroads  and  trusts. 
They  are  directly  connected  with  the  rise  of  large  scale  industry. 
The  large  capital  outlay  now  required  will  give  a  plant  a  temporary 
monopoly  before  it  can  be  duplicated,  of  which  it  may  be  able  to 
make  considerable  use,  if  business  is  good;  while  the  law  of  in- 
creasing returns  gives  the  large  concern  in  many  industries  such 
an  advantage  over  smaller  competitors  that  it  is  able  to  establish 
a  more  or  less  complete  monopoly  by  virtue  of  its  size.  The  basis 
of  the  monopoly  of  trusts  and  railroads  and  the  recent  development 
thereof,  are  matters  of  pretty  general  knowledge.  Illustrations  are 
better  than  general  statements;  and  we  may  leave  this  important 
cause  of  large  fortunes  with  a  reference  to  section  five  of  Chapter 
III,  where  the  monopoly  of  the  Oil  Trust  is  discussed,  and  the  in- 
fluence of  size,  a  modern  feature,  emphasized.  ^     We  would  only  re- 


1.   Supra,  pp.  56-62. 


IN  THIS  COUNTRY.  77 

mark  again  on  the  centralization  of  industry  which  underHes  the 
great  amount  of  both  competitive  and  monopoly  profits. 

Monopoly  profits,  whether  from  a  patent  or  a  trust,  appear 
superficially  as  returns  on  the  plant  rather  than  for  management; 
and  yet  they  are  profits.  They  do  not  spring  from  mere  possession 
of  capital,  but  from  the  ability  of  the  inventor  or  the  power  of 
organization  of  the  business.  They  are  not  interest,  but  go  to  the 
entrepreneur. 

The  fact  that  there  is  a  monopoly  is  not  at  all  conclusive  of 
unearned  profits.  In  the  case  of  a  new  enterprise  it  may  be  return 
for  organization  ability  as  we  have  seen.  Again,  the  business  may 
not  be  in  a  flourishing  condition  enough  to  incite  competition  if 
it  were  possible.  Or,  as  in  the  case  of  the  guilds  and  franchises, 
there  may  be  a  beneficial  regulation  of  the  enterprise  by  the  au- 
thorities. In  the  case  of  patents  the  monopoly  is  granted  for 
the  express  purpose  of  insuring  to  the  inventor  the  returns  for 
his  invention  to  which  he  is  regarded  as  justly  entitled.  But 
monopoly  profits  can  be,  and  are  very  apt  to  be, undesirable  in  the 
sense  of  being  unearned. 


:J^- 


§  2.     Besides  the  entrepreneur  or  captain  of  industry,  there  is 
another  type  of  possessor  of  a  large  fortune, — the  capitalist.     The    i 
former  is  engaged  in  business;  the  latter  manages  his_estate.     We  ^ 
have  tried  to  sketch  the  tendencies  which  have  brought  wealth 
to  the  former.     A  related,  yet  different  side  of  economic  progress 
has  produced  the  modern  capitalist. 

In  the  three  fortunes  described,  the  entrepreneur  is  surely 
in  the  majority.  But  the  bulk  of  the  Astor  wealth  still  remains 
unaccounted  for;  and  it  affords  a  good  example  of  a  capitalist's 
estate.  The  policy  adopted  will  be  recalled, — saving  of  income 
and  re-investment  in  real  estate  and  good  securities.  Interest 
on  investments  was  the  important  element  in  the  growth.  ^ 

Capital   is,   of   course,    as   important   to  modern   business   as  4' 
organization   and  management;   and   capital  is  required   in   large    / 
amounts.     This  is  the  key  to  the  development  of  the  interest  re-  '^■• 
turn.     In  the  Middle  Ages  the  dislike  of  any  interest  charge  as 
usury  shows  clearly  enough  the  slight  demand  for  capital.     There 
was  the  further  check  on  the  growth  of  estates  placed  by  the 
danger  of  confiscation  discussed  in  Chapter  IV.     The  demand  of 
sovereigns  for  funds  and  the  need  of  capital  in  the  growth  of  trade, 
changed  the  situation  somewhat.     Money  was  loaned  to  princes 

I.   Supra,  pp.  20-I. 


78 


ECONOMIC  CAUSES  OF  LARGE  FORTUNES 


\ 


and  merchants  at  interest  for  long  periods.  But  again,  it  was  the 
industrial  revolution  which  wrought  the  change  and  raised  the 
interest  rate  for  the  nineteenth  century.  Capital  seeking  invest- 
ment being  comparatively  mobile,  it  was  the  general  demand  which 
affected  the  result.  Railways,  steamships,  factories,  machinery, 
the  wars  of  the  century  and  the  development  of  new  continents, 
have  all  called  for  enormous  outlays  of  capital.  If  the  interest 
rate  be  said  to  depend  upon  the  amount  left  in  cultivating  marginal 
land  after  payment  of  wages,  as  Ricardo  describes  profits,  then 
with  the  bringing  of  new  land  under  cultivation  and  with  improved 
methods  of  agriculture,  the  margin  has  been  greatly  raised  and  the 
laborer  has  not  got  all  the  additional  marginal  product.  It  is  well 
known  that  the  interest  rate  has  been  especially  high  in  this  country. 
The  interest  return  is  steady;  and  the  effect  of  its  compound- 
ing in  increasing  a  large  fortune  with  lapse  of  time  is  indicated  by 
the  following  table.  The  much  greater  effect,  proportionately,  of 
both  the  higher  rates  and  the  longer  periods,  is  to  be  observed. 


Table  of  the  Period  required  for  Capital  to  double,  and  also  of  the  Coeffi- 
cients of  Increase  of  Capital  during  Fixed  Periods,  for  Various  Rates 
of  Interest  with  Annual  Compounding. 


Rate 


2% 

3% 
4% 
5% 
6% 
7% 
8% 
io% 


Period  for 

Doubling 

Years 


35 

23-4 
17.7 
14.  2 
II. 9 
10.  2 

9- 

7-3 


Coefficient  of  Increase 


10  years 


1 .  22 

1-34 
1.48 
1.63 
1.79 
1.97 
2.16 
2-59 


25  years 

50  years 

1.64 

2.69 

2.10 

4 

39 

2.  67 

7 

II 

3-39 

1 1 

47 

4.29 

18 

42 

5-43 

29 

51 

6.85 

46 

9 

10.83 

II 

7-4 

100  years 


7.24 
19.22 


I3I' 
339- 


867.7 


2,200 . 
13.781- 


One  function  of  the  capitalist,  the  function,  the  exercise  of 
which  results  in  the  interest  return,  is  saving; — whether  or  not  fru- 
gality is  involved  depends  on  how  much  he  saves.  Astor  cared 
little  for  present  income,  and  was  willing  to  wait.  He  was  even 
frugal.  The  policy  of  re-investment  has  continued  in  the  family; 
and  by  reason  of  the  long  period  over  which  this  accumulation  of 
capital  has  continued,  interest   amounts  to  a  great  deal  in  the 


IN  THIS  COUNTRY.  79 

fortune.  Suppose  we  assume  that  Mr.  Astor  was  worth  $1,000,000 
in  1805.  Compounded  annually  at  4  per  cent,  this  sum  would 
have  reached  $50,500,000  by  1905;  at  5  per  cent,  $131,500,000. 
Or  on  the  supposition  that  on  Mr.  Astor's  death  in  1848  the 
$20,000,000  he  left  was  set  aside  as  a  separate  fund  and  the  interest 
on  it  regularly  re-invested,  at  a  rate  of  but  4.72  per  cent,  com- 
pounded annually,  it  would  have  grown  by  1905  to  $275,000,000, 
the  amount  of  the  fortune  his  descendants  are  estimated  to  have 
had  at  that  time. 

In  the  Hill  and  Rockefeller  fortunes  interest  has  a  place, 
since  the  entrepreneur,  as  well  as  the  capitalist,  receives  interest 
on  his  investments.  But  in  the  absence  of  such  long  continued 
possession  of  wealth,  it  does  not  play  so  large  a  part,  although  the 
amount  to  be  allowed  as  representing  this  form  of  income  on  the 
funds  they  have  invested  would  be  a  very  considerable  sum.  And 
these  fortunes  are  more  typical  of  the  United  States  in  their  re- 
cent origin  than  that  of  the  Astors.  The  Vanderbilt  and  the 
Gould  fortunes  date  from  the  fifties  and  sixties;  but  in  the  greater 
number  of  cases  of  men  of  wealth, — railroad  men,  promoters, 
merchants,  manufacturers,  mine  owners, — the  start  has  been  of 
later  date.  This  rapid  growth  and  the  notoriously  few  instances 
of  great  wealth  in  this  country  continuing  in  a  family  through  any 
considerable  period,  are  facts  which  lessen  greatly  the  importance 
of  interest  as  a  cause  of  large  fortunes. 

The  return  to  the  capitalist  may  be  much  more  than  the  normal 
interest  rate,  because  if  he  invest  in  a  business  venture  rather 
than  buy  bonds,  he  runs  the  risk  of  loss  of  his  capital,  and  the 
possible  return  must  be  correspondingly  high  to  induce  investment. 
Indeed,  the  average  rate  of  return  on  investments  where  risk  is 
involved  may  be  above  the  normal  interest  rate,  an  extra  return 
for  running  risk.  But  accidental  large  returns  of  this  sort  will 
be  offset  against  losses;  and  such  fortuitous  returns  will  not  play 
a  large  part  in  large  fortunes.  A  m.an  may  be  fortunate  enough  to 
gain  considerable  wealth  in  this  way;  but  he  is  not  likely  to  keep 
it  if  he  leave  it  without  intelligent  guidance  in  risky  ventures. 
The  Astor  estate,  at  all  events,  points  in  this  direction.  The  in- 
vestments, it  would  seem,  have  been  highly  remunerative,  largely 
as  the  result  of  a  distinct  policy  consistently  carried  out. 

This  is  the  other  function  of  the  capitalist.  In  most  cases  he 
will  not  be  content  with  safe  investment,  but  will  seek  by  shrewd, 
far-sighted  policy,  so  to  place  his  funds  that  they  may  yield  more 
than  the  normal  interest  rate  and  yet  not  be  lost.     He  will  seek 


80       ECONOMIC  CAUSES  OF  LARGE  FORTUNES 

I  to  avoid  risk  by  management.  When  Astor  purchased  real  estate, 
it  was  on  the  basis  of  a  future  uncertain  value;  and  his  foresight 
as  to  the  growth  of  the  city  brought  him  large  gains.  ^  XllisJ.s  a 
form  of  enterprise,  of  course,  and  the  returns  are  profits  rather  than 
interest;  yet  it  is  a  return  to  capitalists,  and  its  rise  is  not  the  same 
as  the  growth  of  large  scale  production.  Land  and  stock  sp_ecu- 
lation  stand  apart. 

The  unearned  increment  has  been  the  source  of  great  wealth 
in  this  country.  The  land  passed  at  a  nominal  value  into  private 
hands;  and  the  resulting  increase  in  value,  as  the  country  developed, 
as  cities  grew,  as  mines  were  discovered,  all  has  gone  to  form  in- 
dividual wealth.  In  many  cases,  real  estate  dealings  have  been 
carried  on  like  other  businesses  with  similar  profits.  In  many 
more,  the  land  owners  have  contributed  as  much  as  anyone  to  the 
building  up  of  the  community  which  has  produced  the  tmeamed 
increment.  In  other  cases,  the  owners  have  accidentally  been 
made  rich  by  the  discovery  of  mines  beneath  their  property.  But 
in  still  others,  this  feature  of  our  country's  economic  development 
has  been  made  the  occasion  for  speculation  by  wealthy  capitalists, 
who  by  their  skill  in  buying  land  merely  to  hold  for  a  rise  have 
profited  above  the  normal. 


OF   THE 

UNIVERSfTY 

OF 


I.   Supra,  pp.  15-16. 


MO 


14  DAY  USE 

RETURN  TO  DESK  FROM  WHICH  BORROWED 

LOAN  DEPT. 

This  book  is  due  on  the  last  date  stamped  below,  or 

on  the  date  to  which  renewed. 

Renewed  books  are  subject  to  immediate  recall. 


CCT't, 


'^^'^         BECCIR.    MAR    3'7!i 


^'^'67-1  Ai 


/llffAY  II  197B 


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Geaeral  Library 
University  of  California 

Berkeley 


PAMPHLET  BINDER 

Syracuse,  N.   Y. 
Stockton,  Calif. 


/ 


/ 


